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2012 0213 adobe report


Great research update from Cowen on Adobe.

Great research update from Cowen on Adobe.

Published in Business , Technology
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  • 1. Software Adobe Systems Initiating With Outperform (1) Asset Value Trumps Business Model TransitionFebruary 13, 2012 DiscountAnalysts Conclusion: Initiating coverage on ADBE with an Outperform. As the sayingPeter Goldmacher goes, "50% of marketing spend works, you just never know which 50%". With the(415) 646-7206peter.goldmacher arrival of Big Data, marketing departments are on the cusp of being able correlate marketing spend with revenue. If marketing can quantify hard dollar returns for its programs by connecting all the links in the digital chain, weJoe del Callar believe marketing technology budgets could grow materially. Adobe, the top(415) brand in marketing technology, is very well positioned to benefit from this secular trend. However, the company has a lot of work to do to get from here to there. Adobe is in the midst of a business model transition focused on growth by changing its distribution and pricing models. This introduces real risk in the intermediate term to earnings and is compounded by the need to fill in some important holes in the product line up. While we share investor concerns that ADBE may not be able to make this transition quickly, we believe that there are a myriad of potential acquirers that could benefit from accelerating Adobes transition away from the glare of the public markets. Lots of Moving Parts; Challenges and Opportunities. ADBE is approximately two quarters into a multi year business model transition away from channel sales for mature products and desktop pricing models towards direct sales for growth products and subscription revenues for Digital Media. Street confidence in this transition is low and forecasting revenues and profitability during this transition is difficult. Additionally, we believe Adobe needs to build out its offerings to include Social Media and broader lead generation solutions. If Adobe can put together a comprehensive suite that can create, execute, monitor and quantify multi channel digital marketing campaigns, we are confident that marketing as a discipline will be willing to spend more money on technology that can quantify the tangible benefit of money invested in marketing programs. We believe hypothetical fair value in a takeout is > $50/shr. ADBE trades at 13x CY12 EPS estimates of $2.44 (+6%) with an 8% FCF yield.ADBE (02/10) $32.21 Revenue $MMMkt cap $16.0B FY 2011 2012E 2013EDil shares out 496.3MM Nov Actual Prior Current Prior CurrentAvg daily vol 2,803.3K Q1 1,027.7 —— 1,052.7 —— ——52-wk range $22.7-36.0 Q2 1,023.2 —— 1,099.6 —— ——Dividend Nil Q3 1,013.2 —— 1,085.7 —— ——Dividend yield Nil Q4 1,152.2 —— 1,172.8 —— ——BV/sh $11.65 Year 4,216.3 —— 4,410.7 —— 4,785.2Net cash/sh $2.82 EV/S —— —— 3.3x —— 3.0xDebt/cap 20.8%ROIC (LTM) 11.6%5-yr fwd NA OpEPS $growth (Norm) FY 2011 2012E 2013E Nov Actual Prior Current Prior Current Q1 0.58 —— 0.57 —— —— Q2 0.55 —— 0.60 —— —— Q3 0.55 —— 0.59 —— ——S&P 500 1342.6 Q4 0.67 —— 0.66 —— —— Year 2.35 —— 2.42 —— 2.67 P/E —— —— 13.3x —— 12.1xPlease see addendum of this report for important disclosures.
  • 2. Adobe Systems Table of Contents Page Executive Summary ................................................................................... 4 Company Background ...................................................................................... 4 Transforming the Business............................................................................... 5 A Takeout Target? ............................................................................................ 9 Valuation ................................................................................................ 10 Return on Invested Capital Analysis ........................................................ 11 Financials................................................................................................ 12 Recent Results and Guidance ......................................................................... 12 Revenue Dynamics and Seasonality ................................................................ 12 Profitability Dynamics and Seasonality............................................................ 13 Investment Positives ............................................................................... 14 Investment Risks..................................................................................... 16 Big Growth Opportunity Offset by Many (Smaller) Concerns .................... 19 Management Guidance: Exceeds Consensus Revenue, Possibly Conservative .................................................................................................. 19 The Realignment: An Overview ....................................................................... 22 Digital Media: Hiking Prices, Gaining Users in a Delicate Transition to Subscription Pricing ....................................................................................... 22 Digital Marketing: Revenue Growth Tempered by a Shrinking Legacy Enterprise Business ........................................................................................ 31 New Segment 1: Digital Media................................................................. 38 End Market Opportunity ................................................................................. 38 Customer Profile ............................................................................................ 39 Products ........................................................................................................ 40 Revenue and Revenue Cyclicality .................................................................... 44 Go to Market Strategy .................................................................................... 46 Competition ................................................................................................... 48 New Segment 2: Digital Marketing .......................................................... 54 End Market Opportunity ................................................................................. 54 Customer Profile ............................................................................................ 552 February 13, 2012
  • 3. Adobe Systems Products ........................................................................................................ 56 Revenue and Sensitivity to the Macro Environment ......................................... 60 Go to Market Strategy .................................................................................... 62 Competition ................................................................................................... 62Segment 3: Print and Publishing.............................................................. 71 End Market Opportunity and Customers ......................................................... 71 Products ........................................................................................................ 71 Growth Strategy ............................................................................................. 72 Competition ................................................................................................... 73 February 13, 2012 3
  • 4. Adobe Systems Executive Summary Company Background Founded in 1982 with a product called Postscript, a language used to control graphics and type on printers, Adobe has grown into a $4B global provider of marketing software solutions used by enterprises and consumers to create, manage, deliver and analyze digital content for desktops, tablets, smart phones and other media channels. Over half of the company’’s revenues are generated from outside the US. The company has historically leveraged acquisitions to broaden its product portfolio. The two most prominent acquisitions include the 2005 $3.4B acquisition of competitor Macromedia (Shockwave, which contributed to Flash) and the 2009 acquisition of web marketing analytics provider Omniture for $1.8B. Its two most recent acquisitions which are included in guidance, Day Software (Communiqué/CQ) and Demdex, were completed in October 2010 and January 2011, respectively. Its acquisition of Efficient Frontier was completed in January 2012, but is not yet in guidance. The company is in the process of streamlining its go to market strategy around its higher growth core offerings for the creation, distribution and analysis of digital content. The company intends to de-emphasize slower growth products in favor of larger, more contemporary product sales, which is a necessary but complex change management exercise fraught with risk. The two main segments are as listed below, followed by its smaller, less important segment: • Digital Media. The company’’s content creation segment, which includes products like Creative Suite and Photoshop, is undergoing a transformation from a predominantly up front license model to a subscription model. The goal of this change is to improve revenue visibility and catalyze new customer growth as a subscription pricing scheme theoretically drives a higher lifetime value of a customer while simultaneously attracting new customers with a lower initial price point. However, the company is not changing the delivery model from desktop to SaaS so the tangible benefit to the customer of this new pricing model is unclear. Managing this transition is very tricky and will likely lead to volatility in the model. Digital Media is sold primarily via channels and is 73% of Adobe’’s revenue. • Digital Marketing. The company’’s Digital Marketing effort will focus on Adobe’’s Omniture marketing analytics and Day web content execution products. Sales and marketing spend will be consolidated from other slower-growth Enterprise segment products to focus on these two core product sets that are expected to grow over 20% per year through FY14. The shift of S&M spending away from the company’’s other enterprise products such as its traditional content management and collaboration (LiveCycle and Connect) products that were growing, albeit likely more slowly, is expected to cause revenue from these products to decline. However, we believe the set up for margin expansion, even as sales of some products decline, is good as more focused marketing efforts should help ADBE reduce its higher than industry average S&M expenses as a percentage of sales. The company is also making a relatively small transition (compared to the Digital Media) of the $100M Day business from license to subscriptions. Digital Marketing is sold through a direct sales force and is 22% of Adobe’’s revenue.4 February 13, 2012
  • 5. Adobe Systems• Print and Publishing. The Print and Publishing segment includes legacy products like ColdFusion and FrameMaker, and generates about 5% of sales. We do not expect management to invest much time or effort into these businesses.Excluding the $570M revenue contribution from its acquired Day and Omnitureunits, revenue has been flat since FY08 at about $3.6B, including the CS5 productcycle. It’’s reasonable to expect that the CS6 product cycle, expected to start 1H12,could provide a catalyst for the stock.The goal of the restructuring is to drive high single, low double digit growth byemphasizing the fast growing Day and Omniture units and the higher life time valueenabled by the change to subscription pricing in Digital Media business. Investorsshould expect volatility in the model as Adobe embarks on the delicate transitionfrom desktop to subscription pricing.In this initiation, we outline the investment opportunity and risk in Adobe’’stransformation and then delve into the transition in more detail. We then provide abackground on the company and each of the new segments.Transforming the Distribution and Pricing ModelAdobe is in the process of making two significant transformations: reorganizing itsfour main lines of business into two more focused business units and shifting to asubscription revenue model. There is also a slightly less far-reaching shift in S&Mspending in the new Digital Marketing segment that could help continue stronggrowth, but at the expense of existing lower-growth revenue streams. We discussthese major transformations here.The New Revenue SegmentsAdobe is realigning 95% of its business into two segments that the company istransforming for higher growth.• Digital Media. This segment (73% of FY11 revenue) services customers’’ needs in the creation, management and delivery of data from digital sources, including digital documents, websites, photos and video. This new segment includes Adobe’’s former Creative & Interactive segment, and the Knowledge Worker sub segment of the former Digital Enterprise segment.• Digital Marketing. This segment (22% of FY11 revenue) serves enterprise’’s needs to drive revenue through digital media channels including websites, mobile and IP TV. Products and services allow users to analyze digital media traffic and deliver the most appropriate content to maximize the chances of converting a visitor into a paying customer. This new segment includes Omniture and much of Adobe’’s Enterprise sub segment (part of the former Digital Enterprise segment), centered on Adobe’’s Omniture web analytics and Day CQ web content management products.The company will continue its low-growth Print & Publishing segment (5% of FY11revenue) roughly unchanged.February 13, 2012 5
  • 6. Adobe SystemsAdobe Revenue Segments Digital Enterprise Old Revenue Segment Omniture Creative and Interactive Digital Media Print and Publishing Enterprise Knowledge Worker New Revenue Segment Digital Marketing Document Services Digital Media Creatives Print and Publishing Source: Cowen and Company, Company Reports. These mappings are only roughly correct, as there are some nuances in how the company reassigned products to each of the revenue segments. We believe that while this reorganization could be beneficial, it is an operational risk that only serves to complicate the other major transition the company is undergoing. The Transition to Subscriptions In conjunction with the realignment above, the company aims to transition its revenue model from roughly 15% recurring revenue in FY11 to 40% recurring by FY14. In order to accomplish this, Adobe is taking two steps: • In Digital Media: Broadly introducing subscription pricing for its Creative products with the Creative Cloud release (CS6, in 1H12) and adding more subscription based products (e.g., SendNow) to its Document Services line. The transition from shrink-wrap pricing to subscription pricing will materially increase ARPU. The company anticipates that subscriptions to the Creative Suite (CS) will yield an average monthly revenue per user of $40, higher than the average monthly revenue per user of $30 for perpetual licenses. • In Digital Marketing: Aggressively investing to grow its subscription-based Omniture business and transitioning its $100M Day business to subscription pricing. These two businesses are expected to grow over 30% in FY12 and over 20% in FY13 and FY14. While we do not doubt that the 33% hike in ARPU built into its Digital Media subscription pricing will build the company’’s revenue stream over time, the aforementioned target of 40% of revenue to recurring by FY14 does imply very strong growth in the Digital Media segment’’s recurring revenue, as our rough revenue breakout shows below. 6 February 13, 2012
  • 7. Adobe SystemsAdobe Revenue Breakout: Before and After Transition to Subscription ($M) $6,000 $5,324 Digital Marketing: Non- $126 recurring $5,000 Digital Marketing: $1,012 $4,216 Recurring $4,000 $413 $496 $1,100 Digital Media: Recurring $154 $3,000 $2,000 $2,934 Digital Media: Non- $2,899 recurring $1,000 $0 Print and Publishing FY11 FY14E Source: Cowen and Company. Company Reports.Investors may be concerned that guidance implies a $900M increase in Digital Mediaover three years driven by 8x growth in Digital Media’’s recurring revenue streams, aseemingly difficult feat. Given that Digital Media sales increase $600M-$800M in theNTM after a Creative Suite release (except for the unfortunately timed mid-recessionCS4 release), this would imply a significant portion of would-be perpetual licenseshrink-wrap purchasers opting for subscriptions instead.We infer that the model above, based on guidance provided by managementsummarized in the table that follows, requires somewhere between 25% and 70% ofcustomers to make subscription purchases instead of shrink wrap softwarepurchases. Our range is unusually wide as the lack of product, customer and pricemix, and additional variance introduced by the range of Document Servicesscenarios make determining a smaller range infeasible. Our analyses are shown onpp. 28-29.FY11 Results and Guidance for FY12-FY14 FY11 Revs Segment Guidance (Reported) FY12 FY13-FY14 "Core" Digital Marketing $577 20%+ 20%+ LiveCycle and Web Conferencing $333 -$150M Decline Digital Marketing $910 3%-4% Creatives $2,347 10-12% Document Services $741 8-10% Digital Media $3,088 5%-7% Print and Publishing $218 Total Revenue $4,216 4%-6% EPS $2.35 $2.37-$2.47 Source: Cowen and Company, Company Reports.February 13, 2012 7
  • 8. Adobe Systems The transition to subscription pricing in the upcoming CS6/Creative Cloud product cycle (projected release in 1H12) mutes the revenue growth one would expect from a typical CS release cycle (see chart below). Guided growth for Digital Media of 5%-7% in FY12 implies a lift of only $150M-$200M, compared to nearly $600M for CS5 and $800M for CS3. If Adobe’’s customers choose to purchase shrink wrap software instead of software subscriptions, the company could actually significantly outperform revenue guidance in FY12, at the price of lower revenue growth in FY13 and FY14.Digital Media Revenue Before and After Recent Creative Suite Releases ($M) $3,500 $180 $798 ($506) $600 $3,000 $2,500 12 mos Revenue ($M) $2,000 $1,500 $1,000 $500 $2,139 $2,937 $3,061 $2,556 $2,363 $2,955 $3,090 $3,270 2Q06-1Q07 2Q07-1Q08 4Q07-3Q08 4Q08-3Q09 2Q09-1Q10 2Q10-1Q11 2Q11-1Q12E 2Q12E-1Q13E $0 CS3 CS4 CS5 CS6 (E) Creative Suite Release 12 mos Before 12 mos After Source: Cowen and Company, Company Reports. While Digital Media revenues dropped after the release of CS4, we discount this data point somewhat as it was launched in the teeth of the 2008 recession to tepid reviews. The Digital Marketing Spending Shift In a related and slightly less far-reaching transformation, management is reallocating S&M spend in the Digital Marketing segment from its slower-growing legacy enterprise business of enterprise document management and collaboration to its fast-growing Omniture and Day (web content management) businesses. The net effect of this shift is that the company expects an immediate $150M decline in the legacy enterprise business in FY12 and continued subsequent declines in this business. 8 February 13, 2012
  • 9. Adobe SystemsDigital Marketing Revenue Outlook $1,400 $1,200 $1B in Omniture and Day 3%-4% Total FY12 Revenue Combined Revenue Growth (~30% Omniture and Day $1,000 Revenue Growth) $800 $577 $600 $400 $150 Decline from S&M Shift $200 $333 Legacy Enterprise Revenue Declines $0 FY11 FY12 FY13 FY14 Legacy Enterprise Revenue (LiveCycle and Web Conferencing) Core Marketing (Day + Omniture) Source: Cowen and Company, Company Reports.The upside to this shift is that more efficient S&M spend could help improveoperating margins in this business, with a tangible effect on ADBE’’s bottom line (p.37).A Takeout Target?We believe that multiple acquirers could benefit from Adobe’’s existing portfolio andthat the business can benefit from transitioning Adobe away from the glare of thepublic markets.The table below shows recent takeout multiples for similarly-sized software firms.The average takeout multiples are considerably higher than the multiples Adobetrades at today.Recent Takeout Multiples ($MM, except per share data) EV/NTM NTM EV/NTMDate Acquiree Acquiror EV NTM Revs Revs EBITDA EBITDA12/13/2004 PeopleSoft Oracle $8,930.2 $2,829.8 3.2x $614.7 14.5x 9/13/2005 Siebel Oracle $3,714.3 $1,295.3 2.9x $157.3 23.6x 10/8/2007 Business Objects SAP AG $5,489.0 $1,524.7 3.6x $322.9 17.0x 1/16/2008 BEA Oracle $7,184.0 $1,630.8 4.4x $416.7 17.2x 5/12/2010 Sybase SAP AG $6,100.3 $1,258.6 4.8x $457.7 13.3x 8/19/2010 McAfee Intel Corporation $7,680.0 $2,133.3 3.6x $203.2 37.8x 8/18/2011 Autonomy PLC HP $10,500.0 $1,185.3 8.9x $641.5 16.4xHigh 8.9x 37.8xLow 2.9x 13.3xAverage 4.5x 20.0x Adobe $14,588.1 $4,411.1 3.3x $1,843.5 7.9x Source: Cowen and Company. Thomson One IBES.February 13, 2012 9
  • 10. Adobe Systems Valuation At the moment, Adobe is predominantly a traditional license model, and as such should be valued on its EPS multiple. Exiting FY14, the company expects roughly 40% of its revenue to be recurring. At that point, it should be re-evaluated for possible re-valuation based on its FCF multiple. Adobe currently trades at a premium to the group PEG, at 13x consensus CY12 EPS of $2.44 for 6% growth, compared to the group multiple of 15x for 9% growth.Application Software Company Valuation ($MM, except per share data) As of 02/10/12 PF CY12E Stock Market PF CY12E PE / Ent. PF CY12E CY12E EBITDA EV/ Growth CY12 FCF CY12 Op Ticker Rating FYE Price Value EPS P/E Growth Growth Value Rev EV/Rev Growth FCFF EV/FCFF Growth EBITDA Yield Margin Adobe Systems ADBE 1 Nov $32.21 $15,985 $2.44 13x 6% 2.1x $14,588 $4,411 3.3x 7% $1,337 11x 0% $1,844 8x 5% 8.4 % 37.5 % JDA Software Grp JDAS NC Dec $26.52 $1,128 $2.34 11x 8% 1.4x $1,107 $713 1.6x 6% N/A NM N/A $195 6x 9% N/A 23.0 % Manhattan Assoc. MANH NC Dec $45.66 $945 $2.53 18x 14 % 1.3x $846 $367 2.3x 11 % $53 16x 6% $87 10x 19 % 5.6 % 21.9 % Microsoft * MSFT 1 Jun $30.50 $255,918 $2.84 11x 8% 1.4x $215,657 $76,638 2.8x 7% $26,112 8x (2%) $31,954 7x 7% 10.2 % 37.6 % MicroStrategy MSTR NC Dec $122.72 $1,337 $3.07 40x 71 % 0.6x $1,137 $638 1.8x 13 % $60 19x 172 % $64 18x 77 % 4.5 % 6.1 % Oracle ORCL 2 May $28.49 $145,954 $2.48 12x 9% 1.3x $129,720 $38,449 3.4x 4% $12,939 10x 2% $18,253 7x 6% 8.9 % 46.6 % QADA 1 Jan $13.81 15x QAD ** $230 $0.95 9% 1.6x $172 $256 0.7x 5% $26 7x 12 % $28 6x 9% 11.3 % 9.0 % QADB 1 Jan $13.81 15x SAP + SAP 3 Dec $62.90 $74,851 $4.06 15x 8% 2.0x $72,123 $20,694 3.5x 9% $4,844 15x 9% $7,740 9x 9% 6.5 % 33.1 % Perpetual license vendors Median 15x 9% 1.4x 2.3x 7% 12x 7% 7x 9% 7.7 % 23.0 % High 40x 71 % 2.0x 3.5x 13 % 19x 172 % 18x 77 % 11.3 % 46.6 % Low 11x 8% 0.6x 0.7x 4% 7x (2%) 6x 6% 4.5 % 6.1 % Ariba ARBA 1 Sep $29.64 $2,908 $1.00 30x 19 % 1.6x $2,686 $545 4.9x 18 % $70 38x 73 % $127 21x 28 % 2.4 % 20.1 % Aspen Technology AZPN 1 Jun $20.97 $2,018 $0.05 NM NM NM $1,911 $263 7.3x 34 % $88 22x 28 % ($5) NM NM 4.3 % 1.9 % Concur Tech CNQR NC Sep $55.34 $3,017 $0.91 61x 12 % 5.2x $2,790 $464 6.0x 27 % $47 60x 12 % $109 25x 15 % 1.5 % 18.7 % Constant Contact CTCT 1 Dec $30.63 $939 $0.89 35x 31 % 1.1x $800 $251 3.2x 18 % $22 36x (6%) $46 17x 28 % 2.4 % 11.3 % DealerTrack TRAK 1 Dec $28.79 $1,223 $1.09 27x 11 % 2.4x $1,159 $383 3.0x 10 % $68 17x (19%) $85 14x 14 % 5.6 % 18.9 % Intuit INTU 1 Jul $56.70 $17,010 $3.09 18x 15 % 1.2x $16,458 $4,393 3.7x 10 % $836 20x 12 % $1,626 10x 9% 4.9 % 33.2 % Kenexa KNXA 1 Dec $28.17 $786 $1.03 27x 24 % 1.1x $688 $357 1.9x 24 % $32 21x (2%) $57 12x 20 % 4.1 % 10.7 % NetSuite N NC Dec $45.40 $3,082 $0.21 NM 40 % NM $2,940 $299 9.8x 27 % $38 77x 41 % $29 NM 26 % 1.2 % 5.8 % Red Hat * RHT 2 Feb $47.97 $9,265 $1.13 42x 11 % 4.0x $8,456 $1,250 6.8x 19 % $335 25x 5% $357 24x 16 % 3.6 % 25.3 % CRM 3 Jan $128.44 $18,260 $1.60 80x 22 % 3.6x $17,458 $2,906 6.0x 32 % $412 42x 19 % $534 33x 37 % 2.3 % 12.6 % SuccessFactors SFSF NC Dec $39.97 $3,365 $0.11 NM NM NM $3,117 $420 7.4x 26 % $36 86x 104 % $20 NM (8%) 1.1 % 3.1 % Taleo TLEO NC Dec $45.65 $1,894 $1.13 40x 10 % 4.1x $1,783 $380 4.7x 17 % $44 41x 86 % $76 24x 1% 2.3 % 14.1 % Subscription vendors Median 35x 17 % 2.4x 5.5x 21 % 37x 16 % 21x 16 % 2.4 % 13.4 % High 80x 40 % 5.2x 9.8x 34 % 86x 104 % 33x 37 % 5.6 % 33.2 % Low 18x 10 % 1.1x 1.9x 10 % 17x (19%) 10x (8%) 1.1 % 1.9 % All apps Median 27x 12 % 1.5x 3.5x 17 % 22x 12 % 13x 14 % 4.2 % 18.7 % High 80x 71 % 5.2x 9.8x 34 % 86x 172 % 33x 77 % 11.3 % 46.6 % Low 11x 8% 0.6x 0.7x 4% 7x (19%) 6x (8%) 1.1 % 1.9 % Rating system: 1 = Outperform, 2 = Neutral, 3 = Underperform, NC = not covered by Cowen. Restd = Restricted. Estimates are current First Call Consensus estimates when available, Cowen ests provided otherwise. * Covered by Gregg Moskowitz; ests from First Call Consensus ** QAD figures are for the composite of QAD Class A and QAD Class B shares where applicable + SAP financials converted at a rate of $1.3277/Euro Source: Cowen and Company, First Call Consensus Estimates. 10 February 13, 2012
  • 11. Adobe SystemsReturn on Invested Capital AnalysisGiven the rough CS4 product release during the recession that began in 2008, it isnot surprising that the company’’s ROIC took a hit during the recession, whichprimarily hit FY09, going from the mid-teens to the high-single digits. ROIC climbedin FY11 to the double digits with a better CS5 and CS5.5 cycle and we believe it willcontinue to climb if the company is able to hit its revenue goals during the currentbusiness model transformation.ADBE ROIC FY08A FY09A FY10A FY11A FY12E FY13E EBIT (excl. other income) $1,451.8 $1,018.0 $1,386.6 $1,593.0 $1,653.3 $1,813.8 + Implied interest from operating leases 89.8 88.4 105.2 61.7 47.3 38.4 Adjusted operating profits before taxes $1,541.6 $1,106.3 $1,491.7 $1,654.7 $1,700.6 $1,852.1 Income tax expenses $333.5 $248.2 $333.3 $333.8 $358.1 $397.8 + Decrease (-Increase) in deferred tax liabilities 64.7 (119.8) 51.7 18.8 (0.8) (15.9) + Increase (-Decrease) in deferred tax assets 66.0 (33.3) 5.8 8.7 - - + Tax benefits of net interest expense 11.8 9.8 (15.3) (24.5) (27.3) (22.0) + Tax benefits of interests on operating leases 31.4 30.9 36.8 21.6 16.5 13.4 - Tax on other income (5.7) 5.9 2.1 (2.0) (1.7) (2.2) Cash operating taxes $501.8 $141.8 $414.5 $356.4 $344.9 $371.1 NOPAT $1,039.8 $964.6 $1,077.2 $1,298.3 $1,355.7 $1,481.0 Book value of common stock $4,410.4 $4,890.6 $5,192.4 $5,783.1 $6,998.8 $8,366.1 + Deferred tax liabilities 150.3 270.2 218.4 199.6 200.4 216.3 - Deferred tax assets (110.7) (77.4) (83.2) (92.0) (92.0) (92.0) + Accumulated goodwill amortization 2,349.7 4,022.0 4,170.6 4,394.7 4,289.1 4,194.6 + Long term debt 350.0 1,000.0 1,513.7 1,505.1 1,497.1 1,489.1 + Capitalized lease obligations - - 8.8 9.2 9.2 9.2 + PV of operating leases 1,496.4 1,472.6 2,428.1 1,425.3 1,091.3 885.3 - Excess cash (20% of rev rule) 1,303.2 1,315.3 1,708.0 2,068.4 3,376.2 4,804.0 Invested Capital $7,342.8 $10,262.6 $11,740.7 $11,156.7 $10,617.7 $10,264.6 ROIC 14.2% 9.4% 9.2% 11.6% 12.8% 14.4% Source: Cowen and Company, Company Reports.February 13, 2012 11
  • 12. Adobe Systems Financials Recent Results and Guidance The company reported FY11 (November) EPS of $2.35(+22%) on revenue of $4.2B (+11%). The company guided 1Q12 to EPS of $0.54 to $0.59 on revenue of $1.025B- $1.075B. Management guided FY12 to EPS of $2.37 to $2.47 on revenue of $4.385B- $4.47B. Revenue Dynamics and Seasonality Most of Adobe’’s major products, particularly those in the new Digital Media unit that currently account for roughly 73% of the company’’s revenue, have a release coordinated around the company’’s Creative Suite (CS) bundle. Hence, one would expect Adobe’’s revenue to wax and wane with its product cycles. This is evident in the chart below.Adobe Revenue Growth Generally Driven by Product Cycles $2,500 100% CS1 CS2 CS3 CS4 CS5 CS5.5 80% $2,000 60% 43% 41% 42% 39% 37% 34% 34% 34% 33% 40% 28%27% 28% 22% 21%21% 19% 24% 20% 17% 19% 20% Revenue ($M) $1,500 11% 12% 12% 9% 8% 20% Growth (%) 8% 4% 2% 1% (1%) 0% (12%) 0% (17%) (21%) (21%) $1,000 (20%) (40%) $500 (60%) (80%) $0 (100%) 1Q03A 2Q03A 3Q03A 4Q03A 1Q04A 2Q04A 3Q04A 4Q04A 1Q05A 2Q05A 3Q05A 4Q05A 1Q06A 2Q06A 3Q06A 4Q06A 1Q07A 2Q07A 3Q07A 4Q07A 1Q08A 2Q08A 3Q08A 4Q08A 1Q09A 2Q09A 3Q09A 4Q09A 1Q10A 2Q10A 3Q10A 4Q10A 1Q11A 2Q11A 3Q11A 4Q11A Major Creative Release Adobe Revenue Y/Y Growth Source: Cowen and Company, Company Reports. We note that Adobe typically exhibits strong revenue growth starting one to two quarters after a major release of Creative Suite and subsequently ebb. The exception to this pattern was observed after the October 2008 release of Creative Suite 4 (CS4), which was unfortunately timed from a macro perspective. However, the company ostensibly returned to the historical pattern after the release of CS5. CS6 is due in the first half of calendar year 2012, roughly around April, in FY 2Q12. 12 February 13, 2012
  • 13. Adobe Systems Profitability Dynamics and Seasonality Not surprisingly, we find that Adobe’’s earnings are also driven by product cycles, other than the tough CS4 cycle that was marred by a recession and products generally not as well received as other releases in the past.Adobe EPS Growth Also Generally Driven by Product Cycles $1.25 100% CS1 CS2 CS3 CS4 CS5 CS5.5 80% $1.00 60% 43% 41% 42% 39% 34% 34% 37% 34% 33% 28% 27% 28% 40% 22% 21% 21% 19% 24% 20% 17% 19% 20% Earnings ($M) $0.75 11% 12% 12% 20% Growth (%) 9% 8% 8% 1% 4% 0% 2% (1%) (12%) 0% (21%) (17%) (21%) $0.50 (20%) (40%) $0.25 (60%) (80%) $0.00 (100%) 1Q03A 2Q03A 3Q03A 4Q03A 1Q04A 2Q04A 3Q04A 4Q04A 1Q05A 2Q05A 3Q05A 4Q05A 1Q06A 2Q06A 3Q06A 4Q06A 1Q07A 2Q07A 3Q07A 4Q07A 1Q08A 2Q08A 3Q08A 4Q08A 1Q09A 2Q09A 3Q09A 4Q09A 1Q10A 2Q10A 3Q10A 4Q10A 1Q11A 2Q11A 3Q11A 4Q11A Major Creative Release Adobe Earnings Y/Y Growth Source: Cowen and Company, Company Reports. February 13, 2012 13
  • 14. Adobe Systems Investment Positives 50% of Marketing spend is effective. Adobe will be able to tell Marketers which 50% is working. Our overarching thesis for owning Adobe is that marketing as a discipline is on the cusp of transitioning from an art to a science. No longer solely the domain of the creative types, as marketing accelerates its move online, marketers now have the tools to quantify the benefit of their marketing dollars. We believe this dynamic is going to drive a transition in marketing spend where efficient spending is paramount and marketers increase spend on content and tools that can quantify the returns on marketing investments. Reorganized business segments are focusing company on the $14B Digital Marketing and complementary content opportunity. Adobe used to have five (or six, depending on who’’s counting) business units that seemed to chase every conceivable micro-segment of the market. The company has since reorganized down to two core units: Digital Marketing and Digital Media. We believe this will emphasize the role of the company’’s products in the enterprise marketing process, and support this process with its content creation products. Mature legacy products continue in its Print & Publishing segment. We believe this renewed focus will help the company develop into the one-stop software shop for enterprise marketing departments, a $14B market, much like what is to sales departments today. Shift in S&M spend to support the Day and Omniture Digital Marketing units is expected to stimulate Digital Marketing revenue growth post- FY12. Combined, Adobe’’s Omniture and Day units are growing their top line over 20% per year, and the company is shifting its investments to these units from slower-growing units to continue this rapid growth. Although the realignment of sales and marketing resources will result in an initial revenue decline in its legacy enterprise business of $150M, the company expects the resource reallocation to help continue growing its current $600M marketing Omniture and Day business at a rate of over 20% per year to a $1B business by FY14. We quantify the upside from this and the subscription shift in Digital Media in a later section beginning on p. 19. Margin expansion opportunity in the Digital Marketing segment. We estimate that sales & marketing spend for the company’’s Digital Marketing business is at around 30%, well above the low-20% norm of large software companies that sell to the enterprise such as Microsoft, Oracle and even SAP. Conservatively assuming this upside only applies to Digital Marketing, its primary enterprise business, this can lead to 200 bps of margin improvement, or up to 15c upside to Adobe’’s current FY14 earnings of about $2.97. The aforementioned decision to focus on Omniture and Day is a strategy change from selling everything to everyone (Development tools? Collaboration? Manage web/external content? Manage internal content? Instrument your marketing? Sure we got that!) to focusing on more relevant products for a specific audience. The Digital Marketing specialist vs. the enterprise generalists. In the Digital Marketing space, Adobe faces competition from bigger, better-heeled competitors such as Oracle, Microsoft, IBM and HP/Autonomy. While these competitors can offer steeper discounts when bundling their competing Digital Marketing solutions with other offerings, we believe the success enjoyed by Omniture (pre- and post-Adobe), by in the CRM space and by several14 February 13, 2012
  • 15. Adobe Systemscompanies in the HR/Recruiting Automation space suggests that specialists canthrive within the enterprise in their department-level niches.Strong Digital Media product family. Adobe’’s family of content creationproducts is the de facto standard for editing media (““Photoshop”” is a verb inWebster’’s English dictionary) and we estimate it accounts for roughly a third of therevenue currently generated in the space with the remaining revenue shared amongover 20 competitors such as Apple, Microsoft and Corel.Underpenetrated global Digital Media market. While Adobe is the clearmarket leader in Digital Media and accounts for about a third of the revenue in thespace, we believe there is still headroom for growth in the space. We estimateAdobe’’s (paid) product penetration among its target users is only about 35%. Manyof these users may actually be using unpaid (aka pirated) Adobe software, but mayconvert to paid users when Adobe’’s license checking functionality (discussed below)is rolled out.Shift in Digital Media to subscription pricing is designed to catalyzerevenue growth. Excluding the education vertical, the company recentlyintroduced subscription pricing in its predominantly desktop license based DigitalMedia segment that is set up to increase average revenue per user (ARPU) over timewhile attracting new users by lowering the initial cost of owning the product. Thesuccessful small market test of subscriptions on its Creative Suite products, wherethe company observed a 33% hike in revenue and observed that 38% of users signingon were new customers, has led the company to roll this pricing model out morebroadly. With the lower price of entry, the company hopes to add 800K new usersfrom FY15, an improvement from the flat installed base management claims hasbeen the status quo for several years. We quantify the potential upside from this,along with the shift in emphasis in the Digital Marketing unit, in a later sectionbeginning at p. 19.Subscription pricing should help smooth out revenue seasonality.Historically, the company’’s revenue dipped and rose with its Creative Suite (CS)product cycle (p. 12). The transition to a subscription revenue model should helpsmooth out this seasonality. The company expects to introduce the next majorrelease CS6 in 1H12, likely in April (fiscal 2Q12).Roll out of SaaS integrations in CS6 (““Creative Cloud””) can help revenuegrowth. In addition to a shift to subscription pricing, the company’’s CS6 releasewill include SaaS functionality (such as on line storage) to be called ““the CreativeCloud”” that we believe can help revenue by forcing would-be freeloaders to becomepaying customers, and providing the company with more information on customerbehavior for cross-selling and up-selling. Quantification of these opportunities arebeyond the scope of this note as the company unfortunately does not providedetailed enough information to determine up-sell and cross-sell potential, andpotential conversion of users who gravitate to pirated software.February 13, 2012 15
  • 16. Adobe Systems Investment Risks Business transitions are not easy. The reallocation of sales & marketing spend in the Digital Marketing division and the shift to a subscription model in the Digital Media segment represent a significant transition with a likely negative impact on revenue in the short term. Management expects the license-to- subscription shift in its Digital Media segment and a $150M negative revenue impact expected from a reallocation of S&M spend from low-growth to higher-growth businesses in its Digital Marketing segment to reduce FY12 revenue by 4%-5%, resulting in revenue growth of 4%-6% next fiscal year. Overall the company expects the revenue contribution of recurring revenue streams such as maintenance and subscriptions to climb from an estimated 15% today (recurring revenues are more than what is currently reported on the income statement) to about 40% in three years. As we showed on p. 7, this implies very strong growth in the Digital Media segment’’s recurring revenue. Upheaval possible in customer base. In its Digital Marketing segment, the company is likely to lose some of its legacy enterprise product customers (e.g., LiveCycle and Connect) from a transition of investments to high-growth marketing analytics and web content management products. Revenue from these legacy products in Digital Marketing is expected to drop from about $330M in FY11 to $180M in FY12. In its other primary segment, Digital Media, too heavy a hand in forcing new subscription pricing could risk alienating existing customers that are used to purchasing on a shrink wrap license basis. Business model transition may put stock in the doldrums. When it started a similar transition from perpetual to subscription, Ariba had its stock drop from the mid teens to the mid single digits, and did not sustain pre-transition levels until over two years later. And while the Internet Bubble burst during its transition, we note that CA’’s stock was essentially flat over the five years since its transition. We do note that AZPN has so far successfully managed to grow its share price during (despite?) the transition, but we also note that the company is concurrently improving its cash flow situation during the same period.16 February 13, 2012
  • 17. Adobe SystemsARBA, CA and AZPN Share Prices from the Beginning of their Model TransitionsARBA $20 $18 $16 $14 $12 $10 $8 $6 $4 $2 $0 04 05 06 08 4 5 5 8 8 9 9 5 6 6 6 8 9 7 7 7 07 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 20 20 20 20 20 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 0/ 0/ 0/ 0/ 0/ 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30 /3 /3 /3 /3 /3 9/ 3/ 6/ 9/ 3/ 6/ 9/ 3/ 6/ 9/ 3/ 6/ 9/ 3/ 6/ 9/ 12 12 12 12 12CA $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 00 03 04 01 02 2 4 4 5 0 1 1 5 5 1 2 2 3 3 3 4 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 20 20 20 20 20 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 9/ 9/ 9/ 9/ 9/ 29 29 29 29 29 29 29 29 29 29 29 29 29 29 29 29 /2 /2 /2 /2 /2 9/ 3/ 6/ 9/ 3/ 6/ 9/ 3/ 6/ 9/ 3/ 6/ 9/ 3/ 6/ 9/ 12 12 12 12 12AZPN $25 $20 $15 $10 $5 $0 09 10 11 9 9 0 0 0 1 1 1 00 00 01 01 01 01 01 01 20 20 20 /2 /2 /2 /2 /2 /2 /2 /2 0/ 0/ 0/ 30 30 30 30 30 30 30 30 /3 /3 /3 6/ 9/ 3/ 6/ 9/ 3/ 6/ 9/ 12 12 12 Source: Cowen and Company, Company Reports.Meandering strategy. The company has had three realignments over the lastfive years. Not only does this make it difficult to understand the historicalperformance of the segments, it may also signal a lack of a steady hand fordeveloping a stronger presence in the enterprise market, which is likely needed ifthe company aims to grow 20% in its digital marketing products. Given this trackrecord, investors may also be leery of management’’s fortitude to follow through onFebruary 13, 2012 17
  • 18. Adobe Systems what will likely be a difficult multi-year transition in the business in terms of both products emphasized and revenue model. There are important gaps in the product line up that need to be filled. The company’’s suite still lacks solutions for proactive marketing execution, such as marketing campaign execution, email marketing and identifying leads for sales, although it has gone a long way to plug some of these holes with its purchase of display ad placement and execution platform Efficient Frontier. On the Social Media front, we believe that company would be well served to augment its analytics business with actual content. Marketing Analytics on old infrastructure. Omniture, the marketing analytics platform that is a central component in the company’’s plans to grow Digital Marketing at a 20% annual clip in the future, still primarily uses Oracle databases for its backbone, opening it to more cost-effective competition from entrants that use more contemporary Big Data solutions. HTML5 likely drags growth a bit. Many major industry players have thrown their support behind HTML5 which provides support for some of the multimedia functionality that was previously the bailiwick of Flash. In response, Adobe has also decided to support HTML5 (concurrently with Flash) and has discontinued development of Flash on mobile platforms. We do not believe that the loss of near- monopoly status in Flash will be a major drag on revenue, given that Adobe’’s tools are used to produce content in many formats (e.g., Premiere is used to produce both regular MPEG video files and Flash video that is used by sites that need digital rights management). However, we believe guide for 10%-12% growth in Digital Media revenue, including price hikes built into new subscription pricing, could have been slightly higher as some customers who primarily use Adobe tools for Flash could be enticed to switch cheaper HTML5 alternatives.18 February 13, 2012
  • 19. Adobe SystemsBig Growth Opportunity Offset by Many (Smaller)ConcernsOther than a $570M contribution from acquisitions, Adobe’’s revenue has beenstagnant for the last three years, although the company had a bit of a recovery tostage 11% nearly all-organic revenue growth in FY11.The company did a significant realignment of its business segments and is makingsignificant shifts within these new segments to stimulate growth.• In Digital Marketing: Adobe is shifting investments to emphasize its fast growing Day and Omniture electronic marketing units.• In Digital Media: Adobe is shifting to a subscription-based pricing model that has an implicit 33% price hike with supplemental SaaS services (such as giving users space to share their files on line).While we believe that these changes have the potential to catalyze double-digitrevenue growth, the major segment realignment and the switch to subscriptionpricing in Digital Media are fraught with execution risk, while the investmenttransition in Digital Marketing has not-insignificant near term revenue downsideassociated with it.In this section, we first look at the revenue opportunity as framed by management,and then we provide details on the mechanics, benefits and risks associated with therealignment and each of the new segments.Management Guidance: Exceeds Consensus Revenue,Possibly ConservativeIn Digital Media, management expects the increase in ARPU that it is instituting withthe subscription pricing change to catalyze revenue growth after FY12. For DigitalMarketing, it expects additional investments in its Omniture and Day businesses tocontinue the strong revenue growth of the products (30% in FY11). Management hasprovided the following guidance.FY11 Results and Guidance for FY12-FY14 FY11 Revs Segment Guidance (Reported) FY12 FY13-FY14 "Core" Digital Marketing $577 20%+ 20%+ LiveCycle and Web Conferencing $333 -$150M Decline Digital Marketing $910 3%-4% Creatives $2,347 10-12% Document Services $741 8-10% Digital Media $3,088 5%-7% Print and Publishing $218 Total Revenue $4,216 4%-6% EPS $2.35 $2.37-$2.47 Source: Cowen and Company, Company Reports.February 13, 2012 19
  • 20. Adobe Systems The guidance above implies Adobe would grow revenue at a 3-year CAGR in the high-single to low-double digit range through FY14. This guidance is generally above consensus which calls for a 7.5% 3-year CAGR through FY14, as shown below. Adobe in FY14 Based on Midpoint of Revenue Guidance $6,000 Total; $5,324 Total; $4,817 $5,000 Total; $4,422 Total; $4,216 Consensus; $5,216 Consensus; $4,787 $4,000 Consensus; $4,407 Consensus; $4,216 $3,999 $3,000 $3,618 $3,088 $3,274 $2,000 $1,000 $910 $941 $1,001 $1,138 $0 FY11 FY12 FY13 FY14 Print and Publishing Digital Marketing Digital Media Consensus Source: Cowen and Company, Company Reports. The analysis below shows the sensitivity of the FY14 revenue model to the growth of Omniture and Day in Digital Marketing and the growth in the Creative revenue with three scenarios for average decline of the legacy enterprise and Print & Publishing businesses in FY13 and FY14. We assume consensus revenues of $4.41B (+5%) for FY12, which is very slightly below the midpoint of management’’s guidance.20 February 13, 2012
  • 21. Adobe SystemsFY14 Revenue Projections Based on Management’’s Guidance FY13 & FY14 Average Revenue Contraction for Legacy Enterprise and Print & Publishing: (15%) FY14 Revenue - current consensus FY14 revenue - midpoint of Digital Media guidance, low end of OMTR/Day guidance (20%+ growth) Omniture and Day Average Revenue Growth. FY13-FY14 5338.403 10.0% 12.5% 15.0% 17.5% 20.0% 22.5% 25.0% 27.5% 30.0% 5% $4,867 $4,909 $4,952 $4,996 $5,041 $5,087 $5,134 $5,182 $5,231 Digital Media Average 6% $4,919 $4,961 $5,004 $5,048 $5,093 $5,139 $5,186 $5,234 $5,283 7% $4,972 $5,014 $5,057 $5,101 $5,146 $5,192 $5,239 $5,286 $5,335 Revenue Growth 8% $5,024 $5,067 $5,110 $5,154 $5,199 $5,245 $5,291 $5,339 $5,388 FY13-FY14 9% $5,078 $5,120 $5,163 $5,207 $5,252 $5,298 $5,345 $5,393 $5,441 10% $5,132 $5,174 $5,217 $5,261 $5,306 $5,352 $5,399 $5,446 $5,495 11% $5,186 $5,228 $5,271 $5,315 $5,360 $5,406 $5,453 $5,501 $5,550 12% $5,241 $5,283 $5,326 $5,370 $5,415 $5,461 $5,508 $5,556 $5,604 13% $5,296 $5,338 $5,381 $5,425 $5,470 $5,516 $5,563 $5,611 $5,660 14% $5,352 $5,394 $5,437 $5,481 $5,526 $5,572 $5,619 $5,667 $5,716 15% $5,408 $5,450 $5,494 $5,538 $5,583 $5,628 $5,675 $5,723 $5,772 2-Year CAGR, FY12-FY14 Omniture and Day Average Revenue Growth. FY13-FY14 10.0% 12.5% 15.0% 17.5% 20.0% 22.5% 25.0% 27.5% 30.0% 5% 22.0% 22.6% 23.1% 23.7% 24.2% 24.8% 25.4% 25.9% 26.5% Digital Media Average 6% 22.7% 23.2% 23.8% 24.3% 24.9% 25.4% 26.0% 26.6% 27.2% 7% 23.3% 23.9% 24.4% 24.9% 25.5% 26.0% 26.6% 27.2% 27.8% Revenue Growth 8% 24.0% 24.5% 25.1% 25.6% 26.1% 26.7% 27.3% 27.8% 28.4% FY13-FY14 9% 24.7% 25.2% 25.7% 26.2% 26.8% 27.3% 27.9% 28.5% 29.0% 10% 25.3% 25.8% 26.4% 26.9% 27.4% 28.0% 28.5% 29.1% 29.7% 11% 26.0% 26.5% 27.0% 27.5% 28.1% 28.6% 29.2% 29.7% 30.3% 12% 26.6% 27.2% 27.7% 28.2% 28.7% 29.3% 29.8% 30.4% 31.0% 13% 27.3% 27.8% 28.3% 28.9% 29.4% 29.9% 30.5% 31.0% 31.6% 14% 28.0% 28.5% 29.0% 29.5% 30.0% 30.6% 31.1% 31.7% 32.3% 15% 28.7% 29.2% 29.7% 30.2% 30.7% 31.2% 31.8% 32.3% 32.9% FY13 & FY14 Average Revenue Contraction for Legacy Enterprise and Print & Publishing: (10%) FY14 Revenue Omniture and Day Average Revenue Growth. FY13-FY14 5372.209 10.0% 12.5% 15.0% 17.5% 20.0% 22.5% 25.0% 27.5% 30.0% 5% $4,901 $4,943 $4,986 $5,030 $5,075 $5,121 $5,168 $5,216 $5,265 Digital Media Average 6% $4,953 $4,995 $5,038 $5,082 $5,127 $5,173 $5,220 $5,268 $5,316 7% $5,005 $5,047 $5,091 $5,135 $5,180 $5,225 $5,272 $5,320 $5,369 Revenue Growth 8% $5,058 $5,100 $5,143 $5,187 $5,232 $5,278 $5,325 $5,373 $5,422 FY13-FY14 9% $5,112 $5,154 $5,197 $5,241 $5,286 $5,332 $5,379 $5,426 $5,475 10% $5,165 $5,208 $5,251 $5,295 $5,340 $5,386 $5,432 $5,480 $5,529 11% $5,220 $5,262 $5,305 $5,349 $5,394 $5,440 $5,487 $5,535 $5,583 12% $5,275 $5,317 $5,360 $5,404 $5,449 $5,495 $5,542 $5,589 $5,638 13% $5,330 $5,372 $5,415 $5,459 $5,504 $5,550 $5,597 $5,645 $5,694 14% $5,386 $5,428 $5,471 $5,515 $5,560 $5,606 $5,653 $5,701 $5,749 15% $5,442 $5,484 $5,527 $5,571 $5,616 $5,662 $5,709 $5,757 $5,806 2-Year CAGR, FY12-FY14 Omniture and Day Average Revenue Growth. FY13-FY14 10.0% 12.5% 15.0% 17.5% 20.0% 22.5% 25.0% 27.5% 30.0% 5% 22.5% 23.0% 23.5% 24.1% 24.6% 25.2% 25.8% 26.3% 26.9% Digital Media Average 6% 23.1% 23.6% 24.2% 24.7% 25.3% 25.8% 26.4% 27.0% 27.6% 7% 23.8% 24.3% 24.8% 25.4% 25.9% 26.5% 27.0% 27.6% 28.2% Revenue Growth 8% 24.4% 24.9% 25.5% 26.0% 26.5% 27.1% 27.7% 28.2% 28.8% FY13-FY14 9% 25.1% 25.6% 26.1% 26.6% 27.2% 27.7% 28.3% 28.9% 29.4% 10% 25.7% 26.2% 26.8% 27.3% 27.8% 28.4% 28.9% 29.5% 30.1% 11% 26.4% 26.9% 27.4% 27.9% 28.5% 29.0% 29.6% 30.1% 30.7% 12% 27.1% 27.6% 28.1% 28.6% 29.1% 29.7% 30.2% 30.8% 31.4% 13% 27.7% 28.2% 28.7% 29.3% 29.8% 30.3% 30.9% 31.4% 32.0% 14% 28.4% 28.9% 29.4% 29.9% 30.4% 31.0% 31.5% 32.1% 32.6% 15% 29.1% 29.6% 30.1% 30.6% 31.1% 31.6% 32.2% 32.7% 33.3% FY13 & FY14 Average Revenue Contraction for Legacy Enterprise and Print & Publishing: (5%) FY14 Revenue Omniture and Day Average Revenue Growth. FY13-FY14 5407.947 10.0% 12.5% 15.0% 17.5% 20.0% 22.5% 25.0% 27.5% 30.0% 5% $4,937 $4,979 $5,022 $5,066 $5,111 $5,157 $5,204 $5,252 $5,300 Digital Media Average 6% $4,989 $5,031 $5,074 $5,118 $5,163 $5,209 $5,256 $5,303 $5,352 7% $5,041 $5,083 $5,126 $5,170 $5,215 $5,261 $5,308 $5,356 $5,405 Revenue Growth 8% $5,094 $5,136 $5,179 $5,223 $5,268 $5,314 $5,361 $5,409 $5,458 FY13-FY14 9% $5,147 $5,189 $5,233 $5,277 $5,322 $5,367 $5,414 $5,462 $5,511 10% $5,201 $5,243 $5,286 $5,330 $5,375 $5,421 $5,468 $5,516 $5,565 11% $5,256 $5,298 $5,341 $5,385 $5,430 $5,476 $5,523 $5,570 $5,619 12% $5,310 $5,353 $5,396 $5,440 $5,485 $5,531 $5,577 $5,625 $5,674 13% $5,366 $5,408 $5,451 $5,495 $5,540 $5,586 $5,633 $5,681 $5,729 14% $5,422 $5,464 $5,507 $5,551 $5,596 $5,642 $5,689 $5,736 $5,785 15% $5,478 $5,520 $5,563 $5,607 $5,652 $5,698 $5,745 $5,793 $5,841 2-Year CAGR, FY12-FY14 Omniture and Day Average Revenue Growth. FY13-FY14 10.0% 12.5% 15.0% 17.5% 20.0% 22.5% 25.0% 27.5% 30.0% 5% 22.9% 23.4% 24.0% 24.5% 25.1% 25.6% 26.2% 26.8% 27.4% Digital Media Average 6% 23.6% 24.1% 24.6% 25.2% 25.7% 26.3% 26.8% 27.4% 28.0% 7% 24.2% 24.7% 25.3% 25.8% 26.3% 26.9% 27.5% 28.0% 28.6% Revenue Growth 8% 24.9% 25.4% 25.9% 26.4% 27.0% 27.5% 28.1% 28.7% 29.2% FY13-FY14 9% 25.5% 26.0% 26.5% 27.1% 27.6% 28.2% 28.7% 29.3% 29.9% 10% 26.2% 26.7% 27.2% 27.7% 28.3% 28.8% 29.4% 29.9% 30.5% 11% 26.8% 27.3% 27.8% 28.4% 28.9% 29.5% 30.0% 30.6% 31.1% 12% 27.5% 28.0% 28.5% 29.0% 29.6% 30.1% 30.6% 31.2% 31.8% 13% 28.1% 28.6% 29.2% 29.7% 30.2% 30.7% 31.3% 31.9% 32.4% 14% 28.8% 29.3% 29.8% 30.3% 30.9% 31.4% 31.9% 32.5% 33.1% 15% 29.5% 30.0% 30.5% 31.0% 31.5% 32.1% 32.6% 33.1% 33.7% Source: Cowen and Company, Company Reports.February 13, 2012 21
  • 22. Adobe Systems Our tables above suggest that with some reasonable assumptions on the contraction of its legacy enterprise and Print & Publishing businesses, Adobe could outperform consensus revenue expectations through FY14. The Realignment: An Overview Before we delve deeper into the analysis of each segments’’ revenue dynamics, risks and opportunities, it is helpful to discuss the mapping of the former revenue segments to the new segments. The rough mapping is shown below.Adobe Revenue Segment Mapping Digital Enterprise Old Revenue Segment Omniture Creative and Interactive Digital Media Print and Publishing Enterprise Knowledge Worker New Revenue Segment Digital Marketing Document Services Digital Media Creatives Print and Publishing Source: Cowen and Company, Company Reports. The company is merging its former Omniture segment with its Enterprise sub segment into a new reported segment called Digital Marketing. Its Knowledge Worker Segment (now often referred to as Acrobat and Document Services in company presentations) is being merged with the Creatives segments (Creative & Interactive and the old Digital Media segment) into a new Digital Media segment. Print & Publishing remains as it was in FY11. Digital Media: Hiking Prices, Gaining Users in a Delicate Transition to Subscription Pricing The Digital Media segment currently accounts for roughly 73% of Adobe’’s revenue. Adobe provides guidance on two subsets within this new segment. • Creative primarily combines the former Creative & Interactive and Digital Media segments. • Document Services primarily deals with electronic documents including Acrobat, formerly the Knowledge Worker sub segment.Adobe Revenue Segments for Digital Media Digital Enterprise Old Revenue Segment Digital Media Creative and Interactive Knowledge Worker New Revenue Segment Document Services Digital Media Creatives Source: Cowen and Company, Company Reports. 22 February 13, 2012
  • 23. Adobe SystemsWe believe average revenue per Digital Media customer could rise if management issuccessful in executing the delicate shift to a subscription pricing model. Thistransition began on a broad basis for point products (and briefly to the CreativeSuite bundles) in April 2011 and will expand in earnest to Adobe’’s Creative Suitebundles with its CS6 and Creative Cloud product launch in 1H12.In this section we first look at management’’s guidance for the segment and thecatalysts for revenue growth. We also look at the risks associated with thesubscription transition and the risk to Adobe’’s Flash revenue from the rise ofHTML5.Digital Media Guidance and DriversThe company expects Digital Media revenue to grow 5%-7% in FY12, followed by 8%-11% growth in FY13 and FY14, translating to a 3-year revenue CAGR of 7%-10%.Within the segment, management expects roughly 1/3rd of Digital Media’’s Creativesubgroup revenue to be from subscriptions by FY14, following an estimated 3%-6%growth in FY12 and management’’s guided 10%-12% growth in the next two years.We believe the revenue model shift drives a good portion of this revenue increase inCreative for the following reasons.• Subscription Pricing Increases Revenue per User. Despite the lower initial price point, over the typical lifetime of a customer, a subscription customer is expected to generate more revenue than a license customer. The company’’s tests with its Creative Suite (CS) subscription option suggests that the average/amortized monthly revenue per CS user (ARPU), excluding Education users, climbs from $30 per month under its old license programs to $40 per month for subscriptions, basically a 33% price hike.• User Base Increase due to a Lower Entry Price Point from Subscriptions. Perpetual licenses for many of Adobe’’s Digital Media segment products cost at least several hundred dollars or more, even when discounted for businesses. We believe this high license fee is a significant barrier to entry, supported by management’’s characterization of user base growth as flat for the last several years. Management believes the lower initial investment/cost of subscriptions could help the user base add 800K net subscription users by FY15 (600K by FY14). We estimate new users will contribute an incremental $120M to revenue by FY14, or an incremental 1% to Digital Media revenue growth per year.• Incremental Online Functionality. In conjunction with the move to subscription pricing, Adobe is also integrating more SaaS-based functionality into its Creative Suite bundles with the introduction of the Creative Cloud with CS6 in 1H12. This functionality should help the company limit piracy and potentially improve monetization through up-sell and cross-sell of more products. While we acknowledge the possible contribution from these items, piracy impact is beyond the scope of this note and it is difficult to quantify up- sell and cross-sell potential given the lack of information on the company’’s product mix within its installed base.During the same period, the company expects the addition of SaaS products such asEchosign (electronic signatures) and SendNow (large file email attachments) to helpgrow the roughly $950M Document Services (Acrobat) subgroup at an 8%-10% annualclip in FY13 and FY14. Given that the shift in subscriptions for Document ServicesFebruary 13, 2012 23
  • 24. Adobe Systems focuses on supplemental/new products as opposed to the subscription transition Creative is undergoing, and that there is no announced change in this strategy for FY13 and FY14, we infer this growth rate in FY12 as well. Growing the Creative User Base will Help Grow Revenue Management believes the lower initial investment/cost of subscriptions could help the user base add 800K net Creative subscription users by FY15. Assuming this is linear, this translates to 600K net Creative subscription users by FY14, the fiscal year to which management has provided a revenue outlook. This increase is an improvement from the flat Creative user base Adobe has maintained over the last several years. The company has not characterized the composition of these new users, and we believe it would be overly optimistic to assume all these new customers will be high- value commercial CS customers. We believe these users will be a mix of point product, suite and education users. Our estimate of the Creative customer base composition is shown below, based on the 5.6M Creative Suite units disclosed by management exiting 3Q10. Management has not disclosed the point product base. Implicit in this model is that all Creative Suite users are on CS3 or a later version. Calculations for Estimating Point Product User Base Creative Suite Bundles Cumulative Revenue since CS3 Release, Creative & Interactive + Digital Media $9,837.7 Users * Avg Monthly Revenue * 40 = Cumulative Revenue ($M) Commercial 2,450 $30.00 $2,940.0 Education 3,175 $8.21 $1,042.7 - Cumulative Revenue from CS Bundles since CS3 Release $3,982.7 = Cumulative Revenue from Point Products since CS3 Release $5,855.0 Creative & Interactive and Digital Media Point Product Estimate Users * Avg Monthly Revenue * 40 = Cumulative Revenue ($M) Commercial 9,241 $11.32 $4,184.4 Education 11,976 $3.49 $1,670.6 Total 21,217 $5,855.0 Source: Cowen and Company. Company Reports. The above implies a combined user base (Creative Suite plus point product) of roughly 27M users for Adobe’’s Digital Media products. Our estimate of over 78M potential Digital Media users (see p. 39) suggests the Creative market is relatively underpenetrated (35%) and adding 600K users by FY14 is not impossible. We assume the above mix of suite and point products in the installed base to model the composition of the 600K new users expected by FY14. The mix is below.24 February 13, 2012
  • 25. Adobe Systems What 600K New Creative Users Look Like in FY14 (K) Users Current User Base % of Total New User Target (FY14) Creative Suite Bundles Commercial 2,450 9% 55 Education 3,175 12% 71 Total 5,625 21% 126 Creative Point Products Commercial 9,241 34% 207 Education 11,976 45% 268 Total 21,217 79% 474 Total 26,842 600 Source: Cowen and Company. Company Reports. Assuming this mix and the ARPU hike from the subscriptions transition, with point product ARPU list prices proportional to current list pricing, we estimate these new users will contribute $90M in revenue in FY14. This translates to a 1% per year contribution to Digital Media revenue growth and 1.3% per year to Creative revenue growth for the next three years. The following shows the new Creative user revenue contribution based on varying assumptions on the number of new users added and the ARPU premium relative to existing products. We chose these axes as we believe there is significant upside and downside variability in these two factors as the company is signing on a large new population of paying users.Revenue Contributions from New Creative Users in FY14 Average Increase in ARPU 25% 26% 27% 28% 29% 30% 31% 32% 33% 34% 35% 36% 37% 38% 39% 40% 500 $68.7 $69.3 $69.8 $70.4 $70.9 $71.5 $72.0 $72.6 $73.1 $73.7 $74.2 $74.8 $75.3 $75.9 $76.4 $77.0 525 $72.2 $72.7 $73.3 $73.9 $74.5 $75.0 $75.6 $76.2 $76.8 $77.3 $77.9 $78.5 $79.1 $79.7 $80.2 $80.8 Subscriptions Added (K) 550 $75.6 $76.2 $76.8 $77.4 $78.0 $78.6 $79.2 $79.8 $80.4 $81.0 $81.6 $82.2 $82.8 $83.5 $84.1 $84.7 Net New Creative 575 $79.0 $79.7 $80.3 $80.9 $81.6 $82.2 $82.8 $83.5 $84.1 $84.7 $85.3 $86.0 $86.6 $87.2 $87.9 $88.5 600 $82.5 $83.1 $83.8 $84.4 $85.1 $85.8 $86.4 $87.1 $87.7 $88.4 $89.1 $89.7 $90.4 $91.0 $91.7 $92.4 625 $85.9 $86.6 $87.3 $88.0 $88.6 $89.3 $90.0 $90.7 $91.4 $92.1 $92.8 $93.5 $94.1 $94.8 $95.5 $96.2 650 $89.3 $90.0 $90.8 $91.5 $92.2 $92.9 $93.6 $94.3 $95.1 $95.8 $96.5 $97.2 $97.9 $98.6 $99.3 $100.1 675 $92.8 $93.5 $94.3 $95.0 $95.7 $96.5 $97.2 $98.0 $98.7 $99.4 $100.2 $100.9 $101.7 $102.4 $103.2 $103.9 700 $96.2 $97.0 $97.7 $98.5 $99.3 $100.1 $100.8 $101.6 $102.4 $103.1 $103.9 $104.7 $105.4 $106.2 $107.0 $107.8 725 $99.6 $100.4 $101.2 $102.0 $102.8 $103.6 $104.4 $105.2 $106.0 $106.8 $107.6 $108.4 $109.2 $110.0 $110.8 $111.6 750 $103.1 $103.9 $104.7 $105.6 $106.4 $107.2 $108.0 $108.9 $109.7 $110.5 $111.3 $112.1 $113.0 $113.8 $114.6 $115.4 775 $106.5 $107.4 $108.2 $109.1 $109.9 $110.8 $111.6 $112.5 $113.3 $114.2 $115.0 $115.9 $116.7 $117.6 $118.4 $119.3 800 $110.0 $110.8 $111.7 $112.6 $113.5 $114.3 $115.2 $116.1 $117.0 $117.9 $118.7 $119.6 $120.5 $121.4 $122.3 $123.1 - Adobes target price hike for the Creative Suite and projected 600K new users in FY14. Source: Cowen and Company. Company Reports. The above assumes Education discounts of roughly 70%, in line with current education vs. commercial license list pricing, and that point product subscriptions will be 40% the cost of suites, also based on current license list pricing. For reference, list pricing is summarized in the following table, including upcoming monthly Creative Cloud pricing and annual subscription pricing for Creative Suite (discontinued subsequent to the Creative Cloud announcement). February 13, 2012 25
  • 26. Adobe SystemsLicense vs. Monthly & Annual Subscription Payments and Education Pricing Commercial License Annual Subscription Monthly Subscription Education License Fee Annual Fee 1st Year Savings vs. License Monthly Fee 1st Year Savings vs. License Fee Discount vs. Commercial Creative Suite Bundles (pre Creative Cloud) Creative Suite Design Standard $1,299 $780 40.0% $50+ 44.6% $299 77.0% Creative Suite Design Premium $1,899 $1,140 40.0% $449 76.4% Creative Suite Web Premium $1,799 $1,068 40.6% $449 75.0% Creative Suite Master Collection $2,599 $1,548 40.4% $899 65.4% Creative Suite Production Premium $1,699 $449 73.6% Average $1,859 $1,134 40.2% $60+ 44.6% $509 72.6% Point Products, Creative & Interactive, Digital Media After Effects $999 $588 41.1% $75 9.9% $349 65.1% Audition $349 Dreamweaver $399 $228 42.9% $29 12.8% $149 62.7% Fireworks $299 Flash Builder Standard Edition $249 Flash Builder Premium Edition $699 Flash Builder for PHP Standard Edition $399 Flash Builder for PHP Premium Edition $799 Flash Catalyst $399 Flash Media Interactive Server $4,410 Flash Media Streaming Server $995 Flash Professional $699 $420 39.9% $49 15.9% $179 74.4% Illustrator $599 $348 41.9% $45 9.8% $199 66.8% InCopy $249 InDesign $699 $420 39.9% $49 15.9% Photoshop $699 $420 39.9% $49 15.9% Photoshop Elements $100 Photoshop Extended $999 $588 41.1% $75 9.9% $199 80.1% Photoshop Lightroom $299 $89 70.2% Premiere Elements $100 Premiere Pro $799 $468 41.4% $59 11.4% $349 56.3% Presenter $500 Visual Communicator $399 Average $702 $435 41.0% $54 12.7% $216 69.2% Point Products, Knowledge Worker Acrobat Standard $299 Acrobat Pro $449 $119 73.5% Acrobat Suite $1,199 $180 $15 CreatePDF/ExportPDF $60 $10 Echosign $179 $15 FormsCentral $180 $15 SendNow $120 $10 Average $649 $144 N/A $13 N/A $119 81.7% Source: Cowen and Company. Company Reports. Monthly Creative Suite pricing is for the upcoming Creative Cloud product release. Annual subscription pricing for Creative Suite has been discontinued pending the release of the Creative Cloud and is provided for reference purposes only. Creative Subscription Transition Increases Revenue per User The following slides are from the company’’s analyst day presentation, showing the increase in average revenue per user (ARPU) that the company experienced with its test of subscriptions for its Creative Suite bundles. The slides show that the average Creative Suite commercial license customer generated $30 in monthly revenue for Adobe over their lifetime. Adobe’’s tests show that the average Creative Suite commercial subscription customer contributes $40 in revenue per month over their lifetime. For reference, the company expects to price its upcoming Creative Cloud bundle starting at $49.99 per month. 26 February 13, 2012
  • 27. Adobe SystemsCreative Suite Test Indicates Subscription Model Increases ARPU Source: Company Investor Presentation.Although the company does not disclose the average customer lifetime, if weassume that the retention rates are roughly the same for license and subscriptionusers, this increase is equivalent to a 33% price hike.We note the above tests only apply to Creative Suite bundles. However, we dobelieve the price hike applies to point products as well if similar customer retentionrates hold, given that the ratio between license pricing and subscription pricing forthe bundles is similar for point products as well. As we show in the table on page p.26, both annual Creative Suite bundle and annual point product subscription feesare at a roughly 40% discount relative to shrink-wrap license cost.February 13, 2012 27
  • 28. Adobe Systems The following shows our projections for Creative revenue in FY14 assuming a flat installed base. We vary assumptions on the effective price hike the company is able to achieve and mix of subscriptions as a percent of units in the installed base.FY14 Revenue Contribution of Existing Installed Base with Varying Subscription Mix and ARPU Increase FY14 Creative Revenue % Increase in Average Revenue per User 25% 26% 27% 28% 29% 30% 31% 32% 33% 34% 35% 36% 37% 38% 39% 40% 0% $2,347 $2,347 $2,347 $2,347 $2,347 $2,347 $2,347 $2,347 $2,347 $2,347 $2,347 $2,347 $2,347 $2,347 $2,347 $2,347 % of Installed Base on 10% $2,406 $2,408 $2,411 $2,413 $2,415 $2,418 $2,420 $2,422 $2,425 $2,427 $2,429 $2,432 $2,434 $2,436 $2,439 $2,441 Subscription Plans 20% $2,465 $2,469 $2,474 $2,479 $2,483 $2,488 $2,493 $2,498 $2,502 $2,507 $2,512 $2,516 $2,521 $2,526 $2,530 $2,535 30% $2,523 $2,530 $2,537 $2,544 $2,552 $2,559 $2,566 $2,573 $2,580 $2,587 $2,594 $2,601 $2,608 $2,615 $2,622 $2,629 40% $2,582 $2,591 $2,601 $2,610 $2,620 $2,629 $2,638 $2,648 $2,657 $2,667 $2,676 $2,685 $2,695 $2,704 $2,713 $2,723 50% $2,641 $2,652 $2,664 $2,676 $2,688 $2,699 $2,711 $2,723 $2,735 $2,746 $2,758 $2,770 $2,782 $2,793 $2,805 $2,817 60% $2,699 $2,713 $2,728 $2,742 $2,756 $2,770 $2,784 $2,798 $2,812 $2,826 $2,840 $2,854 $2,868 $2,882 $2,897 $2,911 70% $2,758 $2,775 $2,791 $2,807 $2,824 $2,840 $2,857 $2,873 $2,890 $2,906 $2,922 $2,939 $2,955 $2,972 $2,988 $3,005 80% $2,817 $2,836 $2,854 $2,873 $2,892 $2,911 $2,929 $2,948 $2,967 $2,986 $3,005 $3,023 $3,042 $3,061 $3,080 $3,098 90% $2,875 $2,897 $2,918 $2,939 $2,960 $2,981 $3,002 $3,023 $3,044 $3,066 $3,087 $3,108 $3,129 $3,150 $3,171 $3,192 100% $2,934 $2,958 $2,981 $3,005 $3,028 $3,051 $3,075 $3,098 $3,122 $3,145 $3,169 $3,192 $3,216 $3,239 $3,263 $3,286 3-Year CAGR % Increase in Average Revenue per User 25% 26% 27% 28% 29% 30% 31% 32% 33% 34% 35% 36% 37% 38% 39% 40% 0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% % of Installed Base on 10% 0.8% 0.9% 0.9% 0.9% 1.0% 1.0% 1.0% 1.1% 1.1% 1.1% 1.2% 1.2% 1.2% 1.3% 1.3% 1.3% Subscription Plans 20% 1.6% 1.7% 1.8% 1.8% 1.9% 2.0% 2.0% 2.1% 2.2% 2.2% 2.3% 2.3% 2.4% 2.5% 2.5% 2.6% 30% 2.4% 2.5% 2.6% 2.7% 2.8% 2.9% 3.0% 3.1% 3.2% 3.3% 3.4% 3.5% 3.6% 3.7% 3.8% 3.8% 40% 3.2% 3.4% 3.5% 3.6% 3.7% 3.8% 4.0% 4.1% 4.2% 4.3% 4.5% 4.6% 4.7% 4.8% 5.0% 5.1% 50% 4.0% 4.2% 4.3% 4.5% 4.6% 4.8% 4.9% 5.1% 5.2% 5.4% 5.5% 5.7% 5.8% 6.0% 6.1% 6.3% 60% 4.8% 5.0% 5.1% 5.3% 5.5% 5.7% 5.9% 6.0% 6.2% 6.4% 6.6% 6.7% 6.9% 7.1% 7.3% 7.4% 70% 5.5% 5.7% 5.9% 6.1% 6.4% 6.6% 6.8% 7.0% 7.2% 7.4% 7.6% 7.8% 8.0% 8.2% 8.4% 8.6% 80% 6.3% 6.5% 6.7% 7.0% 7.2% 7.4% 7.7% 7.9% 8.1% 8.4% 8.6% 8.8% 9.0% 9.3% 9.5% 9.7% 90% 7.0% 7.3% 7.5% 7.8% 8.0% 8.3% 8.5% 8.8% 9.1% 9.3% 9.6% 9.8% 10.1% 10.3% 10.5% 10.8% 100% 7.7% 8.0% 8.3% 8.6% 8.9% 9.1% 9.4% 9.7% 10.0% 10.2% 10.5% 10.8% 11.1% 11.3% 11.6% 11.9% - ARPU increase observed in Creative Suite test. Source: Cowen and Company. Company Reports. Our analysis above shows that the company can drive modest growth by converting a portion of its existing license installed base into subscription customers. However, it also implies that the portion of the user base that has to be converted from license to subscription may be high in order to meet management’’s stated revenue growth goals. We go into this in more detail in the next section. Guidance Implies Upheaval in the User Base Even with product introductions and a growing Creative user base helping growth, we believe a significant portion of the existing user base has to make the transition from license to subscription pricing in order for Adobe to hit the targeted 3-year Digital Marketing revenue CAGR of 7%-10%. While new users can simply be steered to subscription products, we believe existing license users may be a bit more difficult to transition given that Adobe must break their routine. We show the percentage of the existing user base that needs to transition from license to subscriptions to achieve the aforementioned 3-year CAGR of 7%-10%. We assume the targeted 33% increase in ARPU from subscriptions, and current products and list pricing. We vary assumptions for Document Services/Acrobat growth and revenue contribution from net new Creative users. We assume 1% monthly churn, roughly consistent with churn presented during the company’’s last analyst day and that the replacements are on subscription plans. 28 February 13, 2012
  • 29. Adobe SystemsA Significant Portion of the Existing User Base has to Transition from Licensesto Subscriptions7% Digital Media 3-Year CAGR Revenue Contribution from Net New Creative Users ($M) $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 $150 5% 47% 47% 46% 45% 44% 43% 42% 41% 40% 39% 38% Document Services 3- 6% 45% 44% 43% 43% 42% 41% 40% 39% 38% 37% 36% Year Revenue CAGR 7% 43% 42% 41% 40% 39% 39% 38% 37% 36% 35% 34% 8% 41% 40% 39% 38% 37% 36% 35% 34% 33% 33% 32% 9% 38% 37% 37% 36% 35% 34% 33% 32% 31% 30% 29% 10% 36% 35% 34% 33% 32% 31% 31% 30% 29% 28% 27% 11% 33% 33% 32% 31% 30% 29% 28% 27% 26% 25% 25% 12% 31% 30% 29% 28% 27% 27% 26% 25% 24% 23% 22% 13% 28% 28% 27% 26% 25% 24% 23% 22% 21% 20% 19% 14% 26% 25% 24% 23% 22% 21% 21% 20% 19% 18% 17% 15% 23% 22% 21% 21% 20% 19% 18% 17% 16% 15% 14%8% Digital Media 3-Year CAGR Revenue Contribution from Net New Creative Users ($M) $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 $150 5% 57% 56% 55% 54% 54% 53% 52% 51% 50% 49% 48% Document Services 3- 6% 55% 54% 53% 52% 51% 50% 49% 49% 48% 47% 46% Year Revenue CAGR 7% 53% 52% 51% 50% 49% 48% 47% 46% 45% 45% 44% 8% 50% 49% 49% 48% 47% 46% 45% 44% 43% 42% 41% 9% 48% 47% 46% 45% 44% 43% 43% 42% 41% 40% 39% 10% 46% 45% 44% 43% 42% 41% 40% 39% 38% 37% 37% 11% 43% 42% 41% 40% 40% 39% 38% 37% 36% 35% 34% 12% 41% 40% 39% 38% 37% 36% 35% 34% 33% 33% 32% 13% 38% 37% 36% 35% 35% 34% 33% 32% 31% 30% 29% 14% 36% 35% 34% 33% 32% 31% 30% 29% 28% 27% 27% 15% 33% 32% 31% 30% 29% 28% 28% 27% 26% 25% 24%9% Digital Media 3-Year CAGR Revenue Contribution from Net New Creative Users ($M) $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 $150 5% 67% 66% 65% 64% 63% 62% 62% 61% 60% 59% 58% Document Services 3- 6% 65% 64% 63% 62% 61% 60% 59% 58% 58% 57% 56% Year Revenue CAGR 7% 62% 62% 61% 60% 59% 58% 57% 56% 55% 54% 53% 8% 60% 59% 58% 57% 57% 56% 55% 54% 53% 52% 51% 9% 58% 57% 56% 55% 54% 53% 52% 51% 51% 50% 49% 10% 55% 54% 54% 53% 52% 51% 50% 49% 48% 47% 46% 11% 53% 52% 51% 50% 49% 48% 48% 47% 46% 45% 44% 12% 50% 50% 49% 48% 47% 46% 45% 44% 43% 42% 41% 13% 48% 47% 46% 45% 44% 43% 43% 42% 41% 40% 39% 14% 45% 44% 44% 43% 42% 41% 40% 39% 38% 37% 36% 15% 43% 42% 41% 40% 39% 38% 37% 36% 36% 35% 34%10% Digital Media 3-Year CAGR Revenue Contribution from Net New Creative Users ($M) $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 $150 5% 77% 76% 75% 74% 73% 72% 72% 71% 70% 69% 68% Document Services 3- 6% 75% 74% 73% 72% 71% 70% 69% 68% 67% 67% 66% Year Revenue CAGR 7% 72% 72% 71% 70% 69% 68% 67% 66% 65% 64% 63% 8% 70% 69% 68% 67% 67% 66% 65% 64% 63% 62% 61% 9% 68% 67% 66% 65% 64% 63% 62% 61% 61% 60% 59% 10% 65% 64% 64% 63% 62% 61% 60% 59% 58% 57% 56% 11% 63% 62% 61% 60% 59% 58% 58% 57% 56% 55% 54% 12% 60% 60% 59% 58% 57% 56% 55% 54% 53% 52% 51% 13% 58% 57% 56% 55% 54% 53% 53% 52% 51% 50% 49% 14% 55% 54% 54% 53% 52% 51% 50% 49% 48% 47% 46% 15% 53% 52% 51% 50% 49% 48% 47% 46% 46% 45% 44% - Acrobat 3-year CAGR implied in managements guidance Source: Cowen and Company, Company Reports.Somewhere between 25%-70% of current Creative users who remain through FY14will need to transition to subscriptions in order for the company to achieve itsrevenue growth guidance. We also note that for the company to reach the high endof its outlook for FY14, the conversion that needs to take place affects a largerportion of its user base.February 13, 2012 29
  • 30. Adobe Systems We do note that Adobe intends to price its Creative Cloud service, which will be the delivery mechanism for subscriptions to Creative Suite in CS6, at $49.99 per month or higher. This is a 67% increase in ARPU, so the conversion metric calculated here could be conservative. However, this is list pricing and may be influenced by (yet to be announced) discounting, particularly in the Education vertical. HTML5: Possibly a Small Drag on Growth The ongoing replacement of Flash (and Shockwave) with HTML5 will likely be a slight drag in revenue in the coming years. The nascent HTML5 standard, with the backing of Apple, Google, Microsoft and Facebook, has evolved to include much of the Web browser video and animation capabilities that were formerly exclusive to proprietary solutions such as Flash, Microsoft’’s Silverlight, and RealNetwork’’s Helix. We believe the net result of this platform shift is a relatively minor drag on Creative revenue growth (guidance is for 10%-12% growth after FY12). We believe that, although HTML5 is an alternative to Flash, Adobe has built its business on supporting many output formats, making these tools more broadly applicable than they would be if they only supported Adobe’’s formats such as Flash and PDF. For example, the Premiere video editing tool is often used to produce regular MPEG videos while also supporting Adobe’’s Flash Video format (often used for copy- protected video), while Dreamweaver users typically use the product for static HTML authoring in addition to Flash animations, as opposed to purchasing a separate authoring tool for HTML. Furthermore, our indirect experience with standards boards and the history of add ons to HTML suggest that settling on rich media functionality in HTML5 will probably take some time, possibly enough for Adobe to come up with replacement revenue streams. For example, the CSS 2.1 standard, an extension of HTML that provides constructs that allow authors to standardize the look and feel of websites was introduced in 2004. CSS 2.1 went through several revisions and was finalized seven years later in June 2011. One can argue that a standard for animations is more complex than the CSS template standard and therefore would logically take a longer period of time to finalize. HTML5 was introduced three years ago in 2008. On the other hand, we do note that Adobe does command a 30% premium for its suites that can author Flash content. We are not suggesting that Flash is solely responsible for this premium. However, absent more detailed and comprehensive usage data which the company does not provide, the magnitude of the price differential makes it impossible to exclude the fact that some customers may pay up primarily for Flash functionality. Therefore, although we believe the impact is likely minor, we do believe that HTML5 could be a slight drag on Creative revenue growth. Management believes that they have accounted for this in their guide for 10%-12% growth in Creative revenue post-FY12.CS Design Standard Price Relative to Other Creative Suite Offerings Flash Upgrade Subscription Average List Creative Suite Edition Dev? Purchase From CS5 From CS4 From Older Suite From Point Product (Annual) Price Design Standard N $1,299 $299 $499 $699 $849 $780 $738 Design Premium Y $1,899 $399 $649 $949 $1,499 $1,140 $913 Web Premium Y $1,799 $399 $649 $949 $1,399 $1,068 $1,067 Standard Edition price 30% Production Premium Y $1,699 $399 $649 $949 $1,099 $1,020 $1,407 lower than average Master Collection Y $2,599 $549 $949 $1,399 $1,399 $1,548 $1,140 Average List Price $1,859 $409 $679 $989 $1,249 $1,111 $1,049 Source: Cowen and Company, Company Website. License/upgrade pricing is current for January. Subscription pricing represents last known prices prior to the company discontinuing CS subscription pricing pending the release of its Creative Cloud suite. 30 February 13, 2012
  • 31. Adobe SystemsDigital Marketing: Revenue Growth Tempered by aShrinking Legacy Enterprise BusinessAdobe’’s new Digital Marketing segment includes Omniture and Day CQ web contentmanagement products, with the other products of its prior Digital Enterprisesegment. Together, these lines contribute just over 20% of Adobe’’s revenue today.The segment will focus on Omniture and Day (which we refer to as ““core marketing””),while de-emphasizing its other products (which we refer to as ““legacy enterprise””),primarily LiveCycle and Web Conferencing. This shift narrows the target of thecompany’’s enterprise direct sales efforts from a mix of IT and marketing customersto primarily marketing customers, removing some of the tension between marketingand IT, which may have chosen non-Adobe solutions (e.g., for collaboration,enterprise content management).Beyond the mitigation of sales/customer conflicts, we believe this move is prudentas we believe marketing is undergoing a transformation from a subjective craft to anumbers driven profession, which presents an opportunity for solutions that helpinstrument, measure and execute marketing programs. Once customers canquantify the revenue benefit of marketing spend, they will be more willing to spendon marketing programs and software.On the positive side we believe Adobe can leverage its leader status in a fragmenteddigital marketing end market to take share and grow at management’’s projected20%+ rate, or about double the projected growth of the market. There might alsoopportunity for this unit to contribute more significantly to Adobe’’s earnings as itgrows given its relatively high S&M spending relative to other enterprise softwarevendors. On the negative side, there is a near term $150M revenue drag from theshift in S&M and R&D resources from the legacy enterprise unit to the coremarketing unit, and the legacy enterprise group could continue to shrink for severalyears.Note: we refer to Digital Marketing in this note as the full revenue segment. We willcall out the core marketing (Omniture plus Day) sub segment explicitly when werefer to these high-growth segments. Omniture and Day were added relativelyrecently to Adobe’’s portfolio via acquisition, with Omniture acquired in October2009 and Day in October 2010.The remainder of this section delves into management’’s guidance and the catalystsfor revenue growth and margin expansion in this unit, along with the significantrevenue contraction in the legacy enterprise business.Digital Marketing GuidanceAdobe initially expects its Digital Marketing group revenue (including the legacyenterprise business) to grow at 3%-4% in FY12. Details are shown below. We notethat management’’s guidance adjusting for the $150M contraction in legacyenterprise sales suggests that Omniture and Day FY12 revenues grow just over 30%.February 13, 2012 31
  • 32. Adobe Systems Implications of FY12 Digital Marketing Guidance to Omniture and Day Revenue Guidance Segment FY11A 3% Growth 4% Growth Legacy Enterprise $333 $183 $183 Core Marketing (Day + Omniture) $577 $754 $763 Total Digital Marketing $910 $937 $946 Y/Y Analysis Legacy Enterprise (45.0%) (45.0%) Core Marketing (Day + Omniture) 30.8% 32.3% Total Digital Marketing 3.0% 4.0% Source: Cowen and Company, Company Reports. Beyond FY12, revenue is expected to grow at over 20% through FY14. Management expects the core marketing business (Day and Omniture) to be a roughly $1B business in FY14, while legacy enterprise revenue is expected to decline. Digital Marketing Revenue Outlook $1,400 $1,200 $1B in Omniture and Day 3%-4% Total FY12 Revenue Combined Revenue Growth (~30% Omniture and Day $1,000 Revenue Growth) $800 $577 $600 $400 $150 Decline from S&M Shift $200 $333 Legacy Enterprise Revenue Declines $0 FY11 FY12 FY13 FY14 Legacy Enterprise Revenue (LiveCycle and Web Conferencing) Core Marketing (Day + Omniture) Source: Cowen and Company, Company Reports. Omniture and Day: Growing End Market with Low Current Share Adobe expects to grow the core marketing segment (Omniture and Day combined) over 20% per year over the next several years through 2014, roughly twice the rate at which Gartner expects this estimated $4B end market to grow. This guide excludes Efficient Frontier.32 February 13, 2012
  • 33. Adobe Systems Omniture and Day End Markets $8,000 $154 $7,000 $140 $128 $6,000 $2,769 $115 Market Revenue ($M) $102 $2,510 $5,000 $2,273 $89 $2,061 $4,000 $1,861 $1,649 $3,000 $4,379 $2,000 $3,944 $3,553 $3,201 $2,851 $2,417 $1,000 $0 CY10 CY11 CY12 CY13 CY14 CY15 Marketing Automation (12.6% 5-Year CAGR) Analytic Apps and Performance Mgmt (10.9% 5-Year CAGR) Dynamic Web Application Tools (11.7% 5-Year CAGR) Source: Gartner, Forecast: Enterprise Software Markets, Worldwide, 2008-2015, 3Q11 Update. CAGR calculations by Cowen and Company. We believe this strong growth in Omniture and Day is possible given that Adobe currently only has 12% share in CY11 in a highly fragmented Digital Marketing market, with over 20+ known competitors (listed beginning on p. 62). We believe it is possible for the company to achieve this growth while gradually gaining share against these competitors.Adobe Has Relatively Small Digital Marketing Share Today CY10, Total Market: $12.0B CY11, Total Market: $13.7B Adobe Adobe Digital Digital Marketing Marketing $402 $577 9.7% 12.0% Other Other $3,753 $4,239 90.3% 88.0% Source: Gartner, Forecast: Enterprise Software Markets, Worldwide, 2008-2015, 3Q11 Update. Company Reports. Share calculations by Cowen and Company. February 13, 2012 33
  • 34. Adobe Systems Efficient Frontier Acquisition is Incremental Revenue Upside Adobe completed its acquisition of privately-held online ad purchasing and optimization solution provider Efficient Frontier on January 17, 2012. Guidance provided in December, 2011 excludes the impact of Efficient Frontier. Efficient Frontier is expected to contribute $60M-$80M to FY12 revenue and is expected to be slightly accretive to earnings. Management will formally update guidance to include Efficient Frontier in its 1Q12 earnings report in March, 2012. Current consensus excludes the Efficient Frontier acquisition, which closed in January 2012. Efficient Frontier will be rolled into the Digital Marketing business, with much of its functionality to be integrated into existing Omniture offerings. This represents richer functionality and further revenue upside for the Digital Marketing suite. Core Marketing: Strong Portfolio with Some Missing Pieces The aim of the typical marketing is to take a target group from brand or product non-awareness to becoming customers that engage in recurring purchasing actions, with advocacy from these customers a prize possession. Marketing 101: Our Interpretation of the Customer Engagement Funnel Prospects Awareness Consideration Conversion Customers Loyalty Advocacy Advocates Source: Cowen and Company. In order to support the push through this pipeline, we believe the following components are required of a marketing solution. We also show Adobe’’s offerings in each area.34 February 13, 2012
  • 35. Adobe SystemsMarketing Solution Components and Adobe’’s Offerings (or Lack Thereof) Campaign Management and Planning eFrontier Campaign Execution Demdex Omniture Proactive (Text/Email/Tweets/etc) Passive (Advertising) None eFrontier Content Creation and Management Day Adobe Digital Media Customer Capture Analysis (Passive/Proactive/Social Channels) Omniture Mass/Consumer (Cust Websites/FB) Direct Sales (CRM/Events/etc) Day Scene7 None Omniture Loyalty (Executed thru FB/Direct Outreach/etc) None Legend: Marketing Area Adobe offering Source: Cowen and Company, Company Reports. While Adobe has the broadest solution for marketing today including stand out content creation products that most other Digital Marketing competitors are missing, we believe it has notable holes in its solution, particularly when it comes to the more proactive aspects of marketing such as direct outreach (email and text messaging are common examples), integration with direct sales, Social content and loyalty program management. We believe the future of Adobe is in connecting all the links in the digital chain. Legacy Enterprise Business Will Drag the Digital Marketing Unit Part of the growth in management’’s guidance involves stimulating Digital Marketing growth by shifting resources from the unit’’s slower-growing businesses (primarily LiveCycle and Web Conferencing) to Omniture and Day. This de-emphasis of what we call the ““legacy”” enterprise business is expected to cause revenue from these products to decline by $150M to roughly $180M in FY12 and to continue to shrink over the next several years. To be clear, we do not believe this business is going to completely disappear given that some existing customers will likely to continue to pay maintenance for its content management applications and are probably going to continue to use its Connect collaboration product. In order to help evaluate Digital Marketing revenue growth relative to assumptions for how much the legacy enterprise business will shrink, we present the following analysis showing the sensitivity of the 3-year Digital Marketing revenue CAGR to various levels of FY14 revenue from the legacy enterprise and the Day & Omniture businesses. February 13, 2012 35
  • 36. Adobe Systems3-Year Digital Marketing Revenue CAGR, Including Legacy Enterprise Business FY11A FY14 Omniture and Day Combined Revenue ($M) Core (Omniture + Day) $577 OMTR+Day Revs $900 $925 $950 $975 $1,000 $1,025 $1,050 $1,075 $1,100 $1,125 $1,150 $1,175 $1,200 Digital Marketing Total $910 OMTR+Day CAGR 16.0% 17.1% 18.1% 19.1% 20.2% 21.1% 22.1% 23.1% 24.0% 25.0% 25.9% 26.8% 27.7% $0 (0.3%) 0.6% 1.5% 2.3% 3.2% 4.1% 4.9% 5.7% 6.5% 7.3% 8.1% 8.9% 9.7% Enterprise Revenue $25 0.6% 1.5% 2.3% 3.2% 4.1% 4.9% 5.7% 6.5% 7.3% 8.1% 8.9% 9.7% 10.4% FY14 Legacy $50 1.5% 2.3% 3.2% 4.1% 4.9% 5.7% 6.5% 7.3% 8.1% 8.9% 9.7% 10.4% 11.2% $75 2.3% 3.2% 4.1% 4.9% 5.7% 6.5% 7.3% 8.1% 8.9% 9.7% 10.4% 11.2% 11.9% $100 3.2% 4.1% 4.9% 5.7% 6.5% 7.3% 8.1% 8.9% 9.7% 10.4% 11.2% 11.9% 12.6% $125 4.1% 4.9% 5.7% 6.5% 7.3% 8.1% 8.9% 9.7% 10.4% 11.2% 11.9% 12.6% 13.4% $150 4.9% 5.7% 6.5% 7.3% 8.1% 8.9% 9.7% 10.4% 11.2% 11.9% 12.6% 13.4% 14.1% $175 5.7% 6.5% 7.3% 8.1% 8.9% 9.7% 10.4% 11.2% 11.9% 12.6% 13.4% 14.1% 14.8% $200 6.5% 7.3% 8.1% 8.9% 9.7% 10.4% 11.2% 11.9% 12.6% 13.4% 14.1% 14.8% 15.5% - Management target for $1B in revenue from Day and Omniture product lines Source: Cowen and Company, Company Reports. There Could be Margin Expansion Opportunity from Improving Digital Marketing Sales Spending Compared to its larger enterprise peers, Adobe spends more on its sales and marketing efforts relative to its revenue. As we show below, enterprise software providers such as ORCL, SAP and MSFT have S&M costs that are roughly 20% of revenue, compared to roughly 30% for Adobe. Adobe S&M Expense as a Percentage of Revenue is Higher than Enterprise Peers 55% 45% 35% 25% 15% 2004 2005 2006 2007 2008 2009 2010 2011 Adobe Oracle Microsoft SAP Ariba Aspen Tech Source: Cowen and Company. Company Reports. This high S&M spend relative to enterprise peers suggests that there could be upside to margins from reducing S&M spend. We quantify this below. 36 February 13, 2012
  • 37. Adobe SystemsIncremental EPS Upside from Improving S&M Spend in Digital Marketing Digital Marketing S&M as % of Revs Op Margin Improvement Incremental EPS 35% (1.0%) ($0.06) 34% (0.8%) ($0.05) 33% (0.5%) ($0.04) 32% (0.3%) ($0.02) 31% (0.1%) ($0.01) 30% 0.1% $0.01 29% 0.3% $0.02 28% 0.5% $0.04 27% 0.8% $0.05 26% 1.0% $0.06 25% 1.2% $0.08 24% 1.4% $0.09 23% 1.6% $0.11 22% 1.8% $0.12 21% 2.0% $0.13 20% 2.3% $0.15 - current S&M as % of revenue Source: Cowen and Company. Company Reports.Although the above shows that S&M spend improvement can have a meaningfulimpact on earnings, we note that department-level enterprise providers such asARBA and AZPN (when its model stabilizes in about a year) spend roughly 30% oftheir revenue on S&M, while SFDC spends over 40% of sales. We therefore believe itis possible that ADBE will not able to reduce its sales spending from current levels.However, Adobe does have the advantage of the ubiquity of its Digital Mediaofferings such as Photoshop among marketing content producers.February 13, 2012 37
  • 38. Adobe Systems New Segment 1: Digital Media This new segment services customers’’ needs in the creation, management and delivery of data from digital sources, including digital documents, websites, photos and video. This new segment includes the following of Adobe’’s former revenue segments. • Creative & Interactive • Digital Media • The Knowledge Worker sub segment of the Digital Enterprise segment Together, these segments account for 70%-75% of Adobe’’s revenue. End Market Opportunity The company believes that imaging and video are driving the explosion of digital content being created, managed and distributed via the Internet. It also sees a growth opportunity in this rapid creation of digital content and the need to modify, deliver and use this content in an increasing number of platforms. Our calculations shown below suggest that Digital Media has an addressable market of roughly $10B globally, excluding the education vertical (which Adobe estimates at $5B). This suggests that Adobe’’s market penetration in terms of revenue is roughly 35%. We assume two general user groups targeted by the units in Adobe’’s Digital Media segment: Creative Professionals and Knowledge Workers. Our calculations assume Adobe’’s ARPU and are roughly in line with Adobe’’s estimate for $6B, adjusted for the subscription price hike. Sizing for these user groups are from our calculations on p. 39.Digital Media Addressable Market Estimate Adobe User Segment US Users (K) Global Users (Est, K) Monthly Revenue Total Annual Revenue ($M) Creative Professional 514.5 6,067.7 $40.00 $2,912.5 Knowledge Worker 6,329.4 74,644.5 $5.07 $4,541.4 Total 6,651.6 78,445.1 $7,453.9 Adobe Digital Media Revenue (ex $480M from Education) $2,599.0 Adobe Market Penetration 34.9% Source: Cowen and Company, US Bureau of Labor Statistics. Relative sizing of service sector globally vs. the US is from the CIA World Factbook. The analysis is based on Adobe’’s estimate that it can extract revenue averaging $40 per month per Creative Professional customer. Implicit in this assumption is that subscription pricing becomes the pricing model of choice. We estimate average Knowledge Worker revenue potential at about 13% of Creative & Interactive products ($5), based on the average subscription price of current Knowledge Worker subscriptions relative to Creative & Interactive subscriptions. We acknowledge that our market size estimates may be optimistic given that many users in the rest of the world (and likely, in the US) may not have the capacity to pay for Adobe’’s offerings, as evidenced by somewhat commonplace software piracy 38 February 13, 2012
  • 39. Adobe Systems admitted to by management and suggested anecdotally by our checks. We acknowledge that the global user base is potentially smaller, although Adobe may attempt to capture this surplus with lower-value/lower-price subscription offerings. Another reason the estimate may be optimistic is that Adobe’’s tools business has been helped by the widespread adoption of its Flash format. Growth in Digital Media tools is likely dragged a little by the shift to the HTML5 standard. We discuss the impact of HTML5 on p. 30. Our estimates exclude the Education vertical market, which Adobe estimates is $5B in revenue potential. Customer Profile There are two general groups targeted by the Creative & Interactive and the Knowledge Worker segments. • Creative Professionals • Knowledge Workers We go into the details of each of these segments in the remainder of this section. Our analysis below of these users identified by Adobe suggests 6.7M potential Digital Media users in the US. Most of these jobs are associated with services industries, and based on the relative size of the US services industry to the global services industry, we believe there could be potential for up to 78M Digital Media users worldwide.Digital Media End User Analysis Adobe Classification Bureau of Labor Statistics (BLS) Category BLS ID US Employment (K) Projected Growth Mean Annual Salary Creative Professionals Graphic designers Graphic Designers 27-1024 192.2 1.2% $48,140.0 Production artists Multimedia Artists and Animators 27-1014 26.6 1.3% $63,440.0 Motion graphic artists Writers Writers and Authors 27-3043 41.0 1.4% $65,960.0 Photographers Photographers 27-4021 54.6 1.1% $35,980.0 Videographers Film and Video Editors 27-4032 19.9 1.1% $61,890.0 Prepress professionals Prepress Technicians and Workers 51-5111 48.1 -1.9% $37,970.0 Web designers and developers Web Developers 15-1179 (subset) 77.9 4.4% $79,370.0 User interface designers Software Developers, Applications 15-1132 (subset) 54.3 3.0% $90,410.0 Video game developers Mobile application developers Total Creative Professionals, Weighted Mean Growth and Salary 514.5 1.6% $57,830.0 Knowledge Workers Accountants Accountants and Auditors 13-2011 1,072.5 2.0% $68,960.0 Attorneys Lawyers 23-1011 561.4 1.2% $129,440.0 Architects Architecture and Engineering Occupations 17-0000 2,305.5 1.1% $75,550.0 Engineers Educators Postsecondary Teachers 25-1000 1,568.2 1.4% $70,040.0 Graphic designers Graphic Designers 27-1024 192.2 1.2% $48,140.0 Insurance underwriters Insurance Underwriters 13-2053 95.4 -0.4% $65,220.0 Stock analysts Financial Analysts 13-2051 (subset) 19.7 1.8% $97,670.0 Total Knowledge Workers, Weighted Mean Growth and Salary 6,329.4 1.2% $70,790.0 Total Potential Users, United States 6,651.6 1.3% $70,440.0 * Relative Size/Growth of Global Services Sector to US Services Sector 11.8 = Total Potential Users, Worldwide 78,445.1 * - Subset of BLS employment category Source: Cowen and Company, US Bureau of Labor Statistics. Relative sizing of service sector globally vs. the US is from the CIA World Factbook. February 13, 2012 39
  • 40. Adobe Systems Given our estimate of nearly 27M Digital Media users, this suggests that Adobe’’s product penetration among potential users is in about 35%. Creative Professionals Adobe’’s old Creative & Interactive and Digital Media segments addressed the needs of Creative Professional users, a group the company defines to include graphic designers, production artists, Web designers and developers, user interface designers, writers, videographers, motion graphic artists, prepress professionals, video game developers and mobile application developers. The lower-price offerings in these segments also address the needs of hobbyists. We estimate that there are roughly 500K Creative Professionals in the US and 6M worldwide. Creative Professionals use products from these units for professional publishing, Web design and development, animation production, application development, multimedia editing, and printing. They work in many industries including advertising, Web design, music, entertainment, broadcasting, fine arts, corporate and marketing communications, product design, user interface design and training. Knowledge Workers Adobe defines Knowledge Workers as customers working in document intensive industries, who regularly create and disseminate high-value information as part of their job. Knowledge Workers include a wide variety of job functions such as accountants, attorneys, architects, educators, engineers, graphic designers, insurance underwriters and stock analysts. These jobs typically require the sharing of information through static or interactive documents. We estimate that there are roughly 6.3M Knowledge Workers in the US and 75M worldwide. Knowledge Workers create content from a variety of sources, and must be able to exchange this content in a format that ensures others can reliably and securely access the information, both within and outside a company. This content therefore often needs to be protected or securely managed and controlled. Products This section lists the products sold by each unit, along with current pricing, where available. Upgrade pricing is based on price of upgrading from the previous release of the software. Subscription pricing is based on a one-year commitment. Given the large number of Digital Media products, we have broken out the products into their former, more granular, segments. • Creative & Interactive • Digital Media • The Knowledge Worker sub segment of the Digital Enterprise segment40 February 13, 2012
  • 41. Adobe SystemsOld Segment: Creative & InteractiveCreative & Interactive sold Adobe’’s Creative Suite, a family of products used tocreate print and online content, including newspapers, magazines, websites, RichInternet Applications (RIAs) and other online or printed documents. These tools arealso often used to create and enhance animated and mobile content for film,television, video and audio productions used in advertising, entertainment,marketing communications, training, and a host of other applications.Products sold by this unit include on premise and on demand content developmenttools such as Flash, Illustrator and Dreamweaver, which are sold individually or aspart of different Creative Suite bundles.The segment’’s latest product set, Creative Suite 5 (CS5), was released in May 2010(FY 2Q10). This release was the first major release to feature integration withOmniture and CS Live online, a set of SaaS offerings that augment Creative Suitecapabilities with value-added online tools. The unit’’s latest ““dot”” release, CS5.5, wasmade available in May 2011. This release focused on mobile development forAndroid, BlackBerry, and iOS, and also added functionality for HTML5.The company is planning to release its CS6/Creative Cloud product in 1H12. Thisproduct, with pricing beginning at $49.99 per month, will serve as the subscriptionversion of Adobe’’s CS bundles. Subscriptions will allow users to download CSproducts and then use them in conjunction with bundled SaaS functionality, such ason line storage.The following table shows the current Creative and Interactive product lineup withcurrent pricing. The upgrade price is based off an upgrade from the latest priorversion while the subscription price is based off of annual subscription pricing.February 13, 2012 41
  • 42. Adobe SystemsCreative and Interactive Segment Products List Price (January 2012) Annual Subscription Monthly Product Description License Price Upgrade Price Price Subscription Price Bundles On-premise Suites Creative Suite Design Standard Primarily for print and PDF publishing. Combines Acrobat Pro, Illustrator, InDesign and Photoshop $1,299 $299 technologies, Version Cue, Bridge, Device Central and Connect software. Creative Suite Design Premium Extends CS Design Standard capabilities to include Web and mobile content publishing. Package $1,899 $399 includes items in CS Design Standard plus Dreamweaver, Flash Catalyst, and Flash Professional. Creative Suite Web Premium Extends CS Design Premium capabilities to include developing web and mobile applications, Uis and $1,799 $399 other interactive digital content. Package includes items in CS Design Premium plus Contribute, Fireworks, Flash Builder Standard, Photoshop Extended and Dynamic Link. Creative Suite Master Collection Adds video and audio capabilities to CS Web Premium. Package includes items in CS Web Premium $2,599 $549 plus After Effects Professional, OnLocation, Flash Builder, Premiere Pro and Media Encoder. On-line Suites CS Live/Creative Cloud Online services which augment the desktop capabilities of Creative Suite; includes CS Review for design Expected feedback, BrowserLab to accurately test website content across browser types, Story for script $59.99+/month development, SiteCatalyst NetAverages for Internet trends data, and web conferencing and productivity apps. Will be replaced imminently by Creative Cloud/CS6. Digital Publishing Suite Single Edition End-to-end tool for designers to publish a single-issue iPad application for sale or distribution through $395 the Apple App Store, such as brochures, books, annual reports or personal design portfolios. Digital Publishing Suite Professional Hosted publishing solution targeted at magazine and newspaper publishers, helping them deploy their Call $495 plus service fees Edition publications to various mobile and tablet devices. Hosted services and flexible e-commerce models allow selling of single issues and subscriptions directly to consumers through mobile marketplaces. Includes analytics capabilities based on Adobe Online Marketing Suite. This suite integrates with Creative Suite bundle workflows. Digital Publishing Suite Enterprise Adds more customizable end user experiences, print subscription platform integration and volume Custom quote discount functionality to the Professional Edition. Standalone Products Desktop Applications Dreamweaver Professional software development application used by designers and developers to create Web $399 $119 $228 $29 applications. Includes capabilities for visually designing HTML pages, coding HTML and application logic and for working with various application server technologies. Fireworks Professional graphics design tool that allows users to rapidly prototype and design Websites while $299 $149 giving users tools for creating images that can be deployed to Web browsers, Flash Player and AIR. Integrates with Dreamweaver, Flash and Photoshop, and supports AIR application development. Flash Professional Provides an advanced development environment for creating Web applications which integrate $699 $119 $420 $49 animation, motion graphics, sound, text and video. Solutions built with Flash Professional are deployed via Web browsers that run Flash Player, and to devices as installable applications using AIR. Illustrator Illustration design tool used to create graphic artwork for print publications, Websites and video. $599 $199 $348 $45 InCopy Editorial tool for collaboration between writers, editors and copy-fitters. A companion to InDesign. $249 $39 InDesign A page layout application for publishing professionals. $699 $119 $420 $49 Presenter Allows users to enhance Microsoft PowerPoint slides with a richer visual experience to help deliver $500 more impactful presentations. Visual Communicator Software used to create newscast-style video presentations. $399 $149 Platforms/Tools AIR Client software which allows developers to build and deploy rich Internet applications on desktop and Free non-PC devices using existing Web development skills (e.g. HTML, Ajax, Flash and Flex). Flash Builder Standard Edition An Eclipse-based integrated development environment for developing cross-platform rich Internet $249 $49 applications with the Flex framework for either Flash or AIR. Flash Builder Premium Edition An Eclipse-based integrated development environment for developing cross-platform rich Internet $699 $49 applications with the Flex framework for either Flash or AIR. Includes advanced development tools. Flash Builder for PHP Standard Edition An Eclipse-based integrated development environment for developing rich mobile, web, and desktop $399 $299 Flex and PHP applications. Flash Builder for PHP Premium Edition An Eclipse-based integrated development environment for developing rich mobile, web, and desktop $799 $299 Flex and PHP applications. Includes advanced development tools. Flash Catalyst An interaction design tool that enables designers to transform artwork into interactive objects without $399 $79 writing code. Flash Lite Client software used in a wide range of non-PC devices including mobile phones and consumer Free electronic devices to provide a subset of Flash Player functionality to run Flash content designed for mobile handsets and other types of devices. Flash Player A widely distributed rich client software on PCs and consumer electronic devices, Flash Player provides Free a runtime environment for rich Internet applications. Flex A free, open source framework for building applications that deploy consistently on major browsers, Free desktops, and computer operating systems using Flash Player and AIR. Edge (preview only) Prototype for a future tool for creating animation and transitions using the capabilities of HTML5. Free for lim prd Mobile Applications Collage Newly-introduced mobile application that lets users capture and refine concepts by combining content $10 from select Creative Suite components into conceptual moodboards. Users can collaborate on these moodboards via the Adobe Creative Cloud service. Initially available for Android. Debut A newly-introduced mobile application that lets users present select Creative Suite designs to clients $10 and colleagues on tablets. Initially available for Android. Ideas Sketching software application for tablet devices such as the Apple iPad. Targeted at creative $6+ professionals for idea capture and intended as a companion tool for other professional design applications from Adobe, including Illustrator and Photoshop. Proto A newly-introduced mobile application that lets users create and share interactive wireframe mock ups $10 and prototypes of websites and mobile apps on tablets. Initially available for Android. Server Products Flash Access A content protection solution that enables the distribution and monetization of premium video content delivered online. Replaces Flash Media Rights Management Server. Flash Media Interactive Server Delivers secure, high-quality video on demand, video blogging and messaging, Web conferencing and $4,410 live video that can be viewed via Flash Player and AIR. Provides a flexible development environment for creating and delivering interactive media applications. Used in many industries, including media and entertainment, telecommunications, advertising, government and education. Flash Media Enterprise Server Delivers large-scale, secure, high-quality video on demand, video blogging, messaging, Web Custom quote conferencing and live video, and real-time communication that can be viewed via Flash Player and AIR; provides a flexible development environment for creating and delivering interactive media applications. Used in many industries, including media and entertainment, telecommunications, advertising, government and education. Flash Media Live Encoder Free media encoder and live audio and video capture software that streams audio and video in real Free time to Flash Media Server or Flash Video Streaming Service. Enables Web broadcasts of live events such as sporting events, concerts, Webcasts, and news and educational events. Flash Media Playback Free media player that can be used by any Website to enable playback of video in the FLV file format Free and other media. Has an extensible plug-in architecture that enables easy integration with CDNs and advertising platforms, as well as support for analytics and additional third-party services. Flash Media Streaming Server Used to deliver live streaming and video-on-demand streaming for lower volume streaming of content $995 $249 that is suitable for small- and medium-size streaming needs. HTTP Dynamic Streaming Video delivery method that enables on-demand and live adaptive bitrate video streaming of standards- Custom quote based MP4 media over regular HTTP connections. HTTP Dynamic Streaming allows customers to use existing caching infrastructures, and provides tools for integrating content preparation into existing encoding workflows. InDesign Server Technology for 3rd-party systems integrators to use for building server-based publishing solutions, Custom quote enabling Adobe partners to provide solutions that automate high-end editorial workflows, collateral creation, variable data publishing and Web-based design. Other On-line Services Business Catalyst Software as a Service which provides an all-in-one capability to develop, maintain, and run a Website to $9+ implement marketing campaigns and sell products online. Flash Media Server on AWS Hosted services for streaming on-demand video for Flash Player runtime across high-performance $5/month plus AWS networks. Built with Flash Media Server, Flash Media Streaming Service provides an effective way to storage and data deliver Flash video to large audiences without the overhead of setting up and maintaining streaming charges server hardware and network. Hosted on Amazon Web Services (AWS). Source: Cowen and Company, Company Reports. 42 February 13, 2012
  • 43. Adobe Systems Old Segment: Digital Media The old Digital Media segment sold Adobe’’s imaging and video products for Creative Professionals and hobbyists. The Digital Media segment’’s products revolve around the unit’’s Photoshop photo editing software and Premiere video editing software. Digital Media also sells the Creative Suite Production Premium bundle that is targeted specifically at video editing. Most of this unit’’s products are also sold as part of Creative Suite and had new versions introduced in conjunction with the major Creative Suite 5 (CS5), release in May 2010 (FY 2Q10). Enhancements were made to many of these products as part of the latest major ““dot”” release, CS5.5, made available in May 2011. The major products that deviated from this release cycle were its Elements products that are targeted at amateur and hobbyist photographers and videographers. The company released version 9 of Photoshop Elements and Premiere Elements in FY 4Q10 (Nov).Digital Media Segment Products List Prices (January 2012) License Upgrade Annual Subscription Monthly Product Description Price Price Price Subscription Price Bundles Creative Suite Production Premium Suite specifically targeted at video editing. Includes Premiere Pro, After Effects, Photoshop Extended, $1,699 $399 Audition, Flash Catalyst, Flash Professional, Illustrator, OnLocation, Device Central, Bridge and Media Encoder. Standalone Products Desktop Applications After Effects Software used to create sophisticated animation, motion graphics and visual effects found in television $999 $179 $588 $75 broadcast, film, DVD authoring and the Web. Provides 2D and 3D compositing, animation and visual effects tools, as well as advanced features such as motion tracking and stabilization, advanced keying and warping tools, and more than 250 additional visual and additional audio effects. Audition Professional tools for sound editing in video and audio productions. Handles a wide range of audio $349 $99 production tasks including recording, mixing, and sound restoration. Photoshop Provides photo design, enhancement and editing capabilities for print, the Web and multimedia. $699 $199 $420 $49 Photoshop is used by graphic designers, professional photographers, Web designers, professional publishers and video professionals, as well as amateur photographers and digital imaging hobbyists. The program has become such a common part of culture that its name is a slang for modifying digital photos. Photoshop Elements Simpler photo editing functionality with organizing, printing and sharing capabilities for amateur $100 $80 photographers and hobbyists who want to create professional-quality images for print and the Web. Photoshop Extended Adds tools for editing 3D and motion-based content and performing image analysis to Photoshop. $999 $349 $588 $75 Targeted at film, video and multimedia professionals; graphic and Web designers using 3D and motion; manufacturing professionals; medical professionals; architects and engineers; and scientific researchers. Photoshop Lightroom Software that addresses the needs of professional photographers and photo hobbyists by providing $299 $99 more efficient and powerful ways to import, select, develop and showcase large volumes of digital images. Premiere Elements Video-editing software for home video editing that allows hobbyists to quickly edit and enhance video $100 $80 footage with effects and transitions, and create custom DVDs for sharing video with friends and family. Premiere Pro Professional digital video editing software used to create broadcast quality content for video, film, $799 $179 $468 $59 DVD, multimedia and streaming over the Web. Visual Communicator Software used to create newscast-style video presentations that can be delivered via e-mail, CD, DVD, $399 $149 PowerPoint or live over the Internet. Mobile Applications Color Lava for Photoshop Allows users to mix colors on an iPad to create custom swatches and five-swatch themes. These $3 swatches can then be accessed in Photoshop. Eazel for Photoshop Sketching tool for the iPad that allows users to create content that can be accessed in Photoshop. $3 Kuler Extension of the full Kuler service, that allows users to create, and share color themes Initially available $10 for Android. Nav for Photoshop Due to the feature rich nature of Photoshop, users often have to navigate through a large set of menu $2 and toolbar options. This app aims to simplify the user experience and improve productivity by augmenting the Photoshop desktop app with an iPad remote control app that helps users quickly select the tools they find most useful. Photoshop Touch Core Photoshop functions on Android. Allows users to work with images on tablets, and then take $10 them further on desktop Photoshop apps. Subscription Services Revel Revel is a photography solution that allows users to seamlessly access to their photo library from $100 $10 iPads, iPhones, and Macs, with no storage or syncing hassles. Allows users to share these photos in social sites such as Facebook and Tumblr. Service includes Photoshop Lightroom functionality. A hosted service that provides customers with the ability to view, enhance and share their photos. It Free, with paid also provides photo backup services Creative Cloud/CS6 introduction may modify this product. packages starting at $20 per year Premiere Express SaaS video editing and video remix application licensed by customers such as those running media Call Call portals to provide consumers with embedded access to video editing and enhancement technologies. Story An online collaborative script development tool used to begin the planning and preproduction phase of Currently free (ends Currently free (ends 4/12 video workflows integrated with other Adobe products. Story automatically turns content in scripts 4/12) into relevant metadata that can be used throughout the Adobe digital video workflow. Source: Cowen and Company, Company Reports. February 13, 2012 43
  • 44. Adobe Systems Old Segment: Knowledge Worker Sub Segment of Digital Enterprise The Knowledge Worker segment’’s products revolved around Adobe’’s line of Acrobat products and the associated Portable Document Format (PDF). The current product family revision, known as Acrobat X (ten), was launched in November 2010 and is offered in Standard and Pro versions, as well as in a new Acrobat Suite. The suite also includes Adobe’’s online forms product FormsCentral, and its associated SendNow and Echosign offerings. Adobe’’s Acrobat family of products has provided for the creation and exchange of electronic documents for nearly two decades and has become the de facto electronic document format. Today, users can collaborate on documents with electronic comments and tailor the security of the files in order to ensure they are accessed by the appropriate audience. It is worthwhile to note that while PDF used to be a proprietary format controlled by Adobe, the company officially released it as an open standard on July 1, 2008, citing a trend at the time of government and other organizations increasingly emphasizing open standards. Adobe royalty-free rights for all patents necessary to make, use, sell and distribute PDF compliant implementations. This move has allowed for several lower-price competitors to Acrobat and the inclusion of free PDF capability in Apple, Microsoft and Google applications.Knowledge Worker Products List Prices (January 2012) License Upgrade Annual Monthly Product Description Price Price Subscription Price Subscription Price Desktop Applications Acrobat Standard Creates Adobe PDF documents from desktop authoring applications such as Microsoft Office and other $299 $139 sources. Supports automated collaborative workflows with commenting tools and review tracking features. Includes everything needed to create and distribute electronic documents that can be viewed on Web browsers or on computer desktops via the free Adobe Reader. Acrobat Pro In addition to the capabilities of Acrobat Standard, Acrobat Pro delivers features targeted at Creative $449 $199 Professional and engineering users such as color separation and measuring tools. It also allows users to add video to documents for playback in Adobe Acrobat and Adobe Reader, create dynamic XML forms with the bundled LiveCycle Designer, collect and distribute data in ad hoc forms, and create PDF documents that accept digital signatures Acrobat Suite A suite which allows business professionals to create interactive PDF experiences such as $1,199 $799 presentations, proposals and training materials. Includes Acrobat X Pro, Photoshop, Captivate, Presenter, LiveCycle Designer and Media Encoder. Reader Software for viewing, searching, and printing of Adobe PDF documents on a variety of hardware and Free operating system platforms. Can also be used to enable collaborative workflows in conjunction with other Adobe offerings, with review and markup tools that normally are not present in the standard Reader product. Subscription Servcies An online collaboration suite which provides simple Web conferencing, centralized online file sharing $180+ $15+ and storage capabilities, and online collaborative applications like a word processor and a spreadsheet authoring tool. CreatePDF/ExportPDF An online PDF file creation service that provides easy conversion of almost all document files to Adobe $90+ $10+ PDF for the secure and reliable sharing of rich electronic documents that can be viewed easily within leading Web browsers or on computers via the free Adobe Reader, or converts PDF to Excel and Word formats. Echosign Web-based electronic signatures and signature automation service. Uses a freemium subscription $179+ $15+ model with a free but very limited-volume offering. FormsCentral A web-based form builder used to create, distribute, and analyze online forms and surveys. Uses a $180+ $15+ freemium subscription model with a free but very limited-volume offering. SendNow An online file sharing service that lets users send, share, and track files online, even large ones, $120+ $10+ without the complications of email size restrictions, multiple email attachments, FTP sites, and overnight shipping services Source: Cowen and Company, Company Reports. Revenue and Revenue Cyclicality Today: License Model Leads to Revenue that Varies with the Product Cycle While we do not have the detailed revenue for these units prior to FY06, the revenue pattern for the company as a whole (shown on p. 12) suggests revenue of the Digital 44 February 13, 2012
  • 45. Adobe Systems Media segment grows with each release of Creative Suite (CS) and then declines thereafter. The company focuses its marketing efforts around its CS releases, and we believe this marketing effort and CS pull along other products. The following shows revenue from these segments and their predecessors (ADBE reclassified segments in FY09 and FY10) over the last five years and the corresponding 5-year CAGR.Digital Media Segment Revenues by Quarter ($M) CS4 Release CS5 Release $3,500 $3,000 $740 $758 $2,500 $680 $654 $166 $558 $2,000 $204 $626 $619 $594 $495 $1,500 $133 $1,000 $2,073 $1,899 $1,578 $1,713 $1,438 $1,332 $500 $0 FY06A FY07A FY08A FY09A FY10A FY11A Creative and Interactive (FY09-present) Digital Media (FY09-present) Creative Solutions (FY06-FY09) Platform (ex revs assigned to Omniture, FY06-FY09) Knowledge Worker Source: Cowen and Company, Company Reports. The units that now compose Digital Media posted a $600M decline in aggregate in FY09, likely due in part to the recession. This segment has recovered since to grow revenue at an average rate of 7% over the last five years. Our chart below shows that revenues generally increase with CS product releases, except, notably for CS4. Our conversations with users at the time suggested that CS3 provided adequate functionality for most of their work. We believe that this and the intervening recession overrode the revenue lift one would typically expect with the release of the CS4. February 13, 2012 45
  • 46. Adobe SystemsDigital Media Initiative Revenues by Quarter ($M) $900.0 CS3 Release CS4 Release CS5 Release CS5.5 Release $800.0 $700.0 $600.0 $500.0 $400.0 $300.0 $200.0 $100.0 $0.0 A A A A A A A A A A A A A A A A A A A A A A A A 06 06 06 06 07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Creative and Interactive (FY09-present) Digital Media (FY09-present) Creative Solutions (FY06-FY09) Platform (ex revs assigned to Omniture, FY06-FY09) Knowledge Worker Source: Cowen and Company, Company Reports. Going Forward: Switch to Subscriptions Will Moderate Cyclicality, Bring in More Users, Increase Revenue per User While one would typically expect revenue for this group to grow with each release of the Creative Suite, we believe this cyclicality will moderate as the company moves to a subscription model. Over the next four years, the company expects the lower entry price point for subscriptions relative to license to attract 800K new users to its Digital Media products and to increase average revenue per user (ARPU). Furthermore, its experience with its core Creative Suite bundles suggests that the switch to subscriptions can increase revenue by a third. Under the license model, a Creative Suite user currently generates revenue of $30 per user per month over their lifetime, which includes the initial license purchase and subsequent upgrades. With its recent push for subscriptions in CS5.5, the company has found that CS subscribers pay $40 per user per month, on average. As we have shown in our analyses starting on p. 19, these changes can help Adobe achieve the low double- digit revenue growth (10%-12%) it expects from Creative after FY12. Go to Market Strategy The company has historically used a mix of partner and direct sales, locking in potential users in postsecondary school or earlier through its educational sales programs, and general consumer marketing through various media channels. 46 February 13, 2012
  • 47. Adobe SystemsThe company is in the process of simplifying its complicated mixed pricing strategyto a predominantly subscription-based pricing model and is in the process ofinstituting technologies to improve the monetization of its users.The Old Way: Products and Pricing for All ComersHistorically, the company has sold its solutions to both individuals and businesses,with wide-net branding, and products and pricing for virtually every subcategory ofuser, purchase decision and platform.To illustrate this old strategy we note the Photoshop family currently has no lessthan seven different product variants most with differentiated pricing for upgrades,subscriptions and new licenses, and differentiated pricing for students, otherindividuals and volume purchases for businesses as well, for a total of 25purchasing options (that we were able to find). Yet all of these Photoshop variantsperform the same basic function of managing and editing photos.Photo Editing for any Budget, Platform, Lifestyle, Etc. Individuals Business StudentProduct License Upgrade Subscription License Upgrade LicenseCarouselPhotoshop in CS5 bundlePhotoshop ElementsPhotoshop ExpressPhotoshop Extended in CS5 bundlePhotoshop LightroomPhotoshop Touch Source: Cowen and Company, Company Website.The preponderance of options available for Adobe’’s products plus the relativelyhigh S&M costs compared to its peers (as shown on p. 36) suggests that this strategyhas reached or is reaching the point of diminishing returns: each incrementalmarketing dollar spent is less profitable. Furthermore, despite all these variedpricing plans, management acknowledges that the company is still plagued bysoftware piracy.The New Way: Simplified Pricing + SaaS Connection = ImprovedMonetizationGoing forward, Adobe generally intends to continue using the same methods toaddress its core customer base of Creative Professionals and Knowledge Workersand secondary market for hobbyists and students/academia. The major changecomes in the integration of new value-added SaaS offerings into its products and thepush to move as much of its unit sales to subscription pricing as possible. Thesetwo moves help the company monetize the user base several ways.• Hikes Prices. Excluding education pricing, the company expects the subscription model to be a net price increase owing to higher annual subscription fees relative to the value of the average license contract amortized over a customer’’s typical lifespan. In its recent experience with CS5.5’’s subscription offering, management has observed that average revenue per userFebruary 13, 2012 47
  • 48. Adobe Systems can be a third higher than the amortized monthly revenue per user realized under the current license offering. • Attracts New Users. Despite the overall price hike, the company’’s CS5.5 experience suggests the lower initial price point of subscriptions compared to purchasing a desktop product attracts new users, with 38% of purchasers new to Adobe. Management expects this shift in pricing to help add 800K new users through FY15. For reference, management has stated that its unit sales have been flat over the last several years (despite increasing revenue over the same time). • Reduces Piracy. While details have not yet been disclosed, management intends for new subscription products to check online whether or not the subscription is active. This would potentially allow the company to disable pirated copies of its software, forcing some portion of would-be pirates to actually pay up for its software. • Improves Cross Selling and Up Selling. The integration of products with Adobe’’s online services provides the company with detailed information on each of its users and their behavior, giving Adobe the insight to target and sell additional products into its user base in an automated manner. Competition Broad-based Competitors This section lists Adobe’’s competitors that serve a broad base of Adobe’’s Digital Media customers, including Creative Professionals, Knowledge Workers and halo customers such as hobbyists. Apple (AAPL, CY10 Software, Service and Other Revenue: $2.7B) Apple designs, manufactures and markets a range of personal computers, mobile communication and media devices, and portable digital music players. It also sells a range of related software, services, peripherals, and networking solutions, while reselling third-party digital content and applications. Apples iconic products and services include the Macintosh computer, the iPhone, the iPad, the iPod, and iTunes. Its software offerings include low-end Photoshop alternatives Aperture and iPhoto, and low-end Premiere video alternatives iDVD and iMovie. Apple also distributes QuickTime, which is an alternative to Adobe’’s Flash products for streaming video and sells several applications, such as iBook that can annotate PDF files, thereby displacing some of the functionality of Acrobat. Google (GOOG, CY10 Revenue, ex-TAC: $22B) Google is a global leader in Internet search and advertising. Google’’s innovations in these areas have made its website a top internet property and its brand one of the most recognized in the world. Businesses use Google’’s AdWords to promote their products and services with targeted advertising, while third parties in its Google Network use AdSense to deliver relevant ads. Its Picasa software is a free photo editing and management package that competes with Adobe’’s low end photo editing products. Google also provides document creation and collaboration capabilities in its Google Apps, including the ability to preview PDF documents, which can be used as an alternative to collaboration features in Acrobat.48 February 13, 2012
  • 49. Adobe SystemsMicrosoft (MSFT, CY10 Server and Tools Software Revenue: $14.1B)Microsoft is the world’’s largest software company. The company provides a varietyof products and services, but is best known for its Windows operating systems andOffice software suite. The company produces a few applications (many of which arefree) that compete with Adobe’’s creative offerings, such as Paint, Picture Manager,Visio, Pinnacle Studio and Movie Maker, while its tools such as Expression,Expression Design and Visual Studio compete with Adobe’’s interactive developmentofferings. The ubiquity of Microsoft Office also likely retards Adobe’’s potential asmany users likely use the built in capabilities of these tools as low end substitutesfor Adobe’’s products. MSFT also supports the XML Paper Specification, a proprietaryformat that is an alternative to Adobe’’s PDF document format and controls asignificant number of video consumption endpoints with 15M Xbox video gameconsoles installed in the US (roughly 12% of US households) and another 10Mworldwide.In the Creative Professional SpaceThis section focuses on competition in the creative professional space. In additionto these competitors listed below, the company also competes with variousmiscellaneous free bundled OEM content creation and management solutions (e.g.,photo editing software vendors bundle with many digital cameras).ACD Systems (Private)Founded in 1993, ACD Systems develops and distributes digital image managementsoftware for consumers, professionals, and developers. Its primary product isACDSee, which allows users to edit, manage and share photos. ACD also produces aprofessional version of ACDSee targeted at photographers which includes advancedediting tools. Other products include a technical illustration and graphicsapplication called Canvas and photo printing application Fotoslate. Customersinclude General Motors, Caterpillar, Boeing, NASA, and CNN. ACD products wereused in the making of the movie Titanic. A group of shareholders took ACD privatein 2007.ArcSoft (Private)ArcSoft develops multimedia technologies and applications for desktop, mobile andembedded platforms. Its software allows users to edit and manage their digitalphotos and video, primarily competing with Adobe’’s various Photoshop andPremiere offerings. ArcSoft receives most of its revenue from license fees from OEMcustomers that bundle its software with mobile phones, digital cameras, opticaldrives, personal computers, and consumer electronics devices. OEM’’s thatcollaborate with the company include large device manufacturers such as Canon,Epson, HP, Nikon, and Panasonic. The company was established in 1994 and isheadquartered in Fremont, California.Avanquest Software (FR:AVQ, CY10 Revenue: €€89M)France-based software publisher Avanquest Software markets software titles,developed in-house or by developer partners, via multiple sales channels.Avanquest addresses the general public through its retail, online and direct-to-consumer channels; businesses through channel sales and dedicated portals; andclients in mobile telephony and information technology sectors through OEMFebruary 13, 2012 49
  • 50. Adobe Systems partners. The company’’s Nova Development subsidiary markets publishing and digital imaging software among its varied consumer offerings. These compete with Adobe’’s Photoshop Elements and Premiere Elements packages. Aviary (Private) Privately-held Aviary is a provider of SaaS creative tools and APIs for web and mobile platforms. Aviary’’s free SaaS applications allow content creators of all genres to build, edit, and share their work in users’’ web browsers. The company’’s objective is to make creation accessible to artists of all genres, from graphic design to audio editing. Aviary and its partners also provide design services for customers. These SaaS tools compete with Illustrator and the lower-end variants of Photoshop. The company’’s APIs allow partners to provide Aviary functionality to their websites and allow for bulk processing of photos. Avid Technology (AVID, CY10 Revenue: $678.5M) Avid began in 1987 with a novel method to transfer videotape footage in real-time to digital hard disks. Today, Avid creates popular digital audio and video technology for a broad range of media applications; from feature films, music recordings, television shows, live concert tours and news broadcasts, to music and movies made at home. Some of Avid’’s most influential and pioneering solutions include Media Composer, Pro Tools, Interplay, ISIS, VENUE, Oxygen 8, Sibelius, System 5, and Pinnacle Studio. Corel (Private) Corel got started with the introduction of CorelDRAW in 1989. Today, Corel is a leading provider of graphics and productivity software, including photo, video and DVD software. Corel has a community of more than 100M active users in over 75 countries, and sells its products through an established network of international resellers, retailers, original equipment manufacturers, and online providers and through its global Web sites. Corel’’s headquarters are located in Ottawa, Canada, with major offices in the US, UK, Germany, Taiwan, China and Japan. In addition to CorelDRAW, products that compete with Adobe’’s portfolio include Digital Studio, Painter, DESIGNER, Paint Shop Pro and VideoStudio. Vector Capital, which at the time owned roughly 70% of the company, took Corel private in January, 2010. Grass Valley (Private) Grass Valley offers a full range of hardware and software products and services supporting television around the world. Customers deploying Grass Valley solutions include most of the worlds leading broadcast and teleproduction facilities, independent video professionals, as well as emerging content creators and distributors providing broadband, telecommunications, and transmission services. Its EDIUS software offering competes with Adobe Premiere at clients with heavier video editing requirements. Kodak (EK, CY10 Consumer Digital Imaging Group Revenue, $2.7B) Founded in 1880 by George Eastman, Kodak is an iconic imaging innovator that helps consumers, businesses, and creative professionals today manage their images, information, and printing. Kodak serves customers in the printing, publishing, packaging, and enterprise markets. The Consumer Digital Imaging Group sells50 February 13, 2012
  • 51. Adobe SystemsKodak’’s digital solutions and its Kodak Gallery products and related digital softwarethat compete with Adobe’’s Photoshop products and service.MAGIX (Prime:DE0007220782, CY10 Revenue: €€38M)MAGIX is a German-based provider of software, online services and digital contentfor multimedia communications. Since 1993, MAGIX has developed technologies forcreating, editing, managing and presenting photos, graphics, videos and music. Thecompany’’s offerings compete with Adobe’’s Photoshop, Premiere, Illustrator,Dreamweaver and Audition offerings. MAGIX operates from branches in the USA,Canada, the UK, France, Italy, Spain and the Netherlands.Navarre (NAVR, CY10 Software Revenue: $390M)Navarre Corporation is a publisher of computer software and a provider of completelogistics solutions to traditional and Internet-based retailers. Its Broderbundsubsidiary, which it acquired with its 2010 purchase of Encore Software, produces aslew of home software packages ranging from small business tools to educationalvideo games. Broderbund’’s Print Shop packages offer a range of design and layouttools that compete with Adobe’’s low end photo and video editing offerings.Photodex (Private)Photodex develops and distribute tools that help consumers and professionalphotographers create slideshows based on digital photos, video and audio sources.Primarily competes with similar functionality in Photoshop Elements and PremiereElements.Quark (Private)Founded and headquartered in Denver, Colorado, in 1981, Quark is a privately-heldprovider of publishing software and solutions for professional designers, small andmid-sized businesses, and large organizations. Quark introduced its flagshipQuarkXPress typography, layout, and color control desktop software in 1987. Today,the company claims more than 3M QuarkXPress users worldwide. Quark also sellsPublishing System, a publishing collaboration package for designers, writers,editors, and other contributors; and QuarkXPress Server, a high-performancepublishing engine that is used to produce catalogs, on demand custom salesliterature, localized advertisements, design-rich database publishing, personalizeddirect mail, and more. Other significant products include Promote, a hosted designand publishing service targeted at small and mid-sized businesses.RealNetworks (RNWKD, CY10 Revenue: $401.7M)RealNetworks pioneered the development of technology for streaming digital mediaover the Internet in 1995 and continues to connect consumers with digital mediaboth directly and through partners, aiming to support every network, device, mediatype and social network. RNWKD distributes its products and services directly toconsumers and through carriers, original equipment manufacturers and othercommunications companies who in turn offer these products and services to theircustomers. The company’’s Helix tools, players and platforms compete with Adobe’’sFlash offerings.February 13, 2012 51
  • 52. Adobe Systems Rovi (ROVI, CY10 Sonic Subsidiary Revenue: $104M) Rovi offerings include interactive program guides, embedded licensing technologies (such as recommendations and search capability), media recognition technologies and licensing of its database of descriptive information about television, movie, music, books. The company also markets game content and analog content protection technologies and services. In February 2011, Rovi acquired Sonic and its Roxio product line. Sonic is best-known for Roxio Creator and Roxio Toast that compete with various offerings of Adobe’’s Digital Media segment. Sony (SNE, CY10 Revenue: ¥6.6B) Japan-based conglomerate Sony is known for its myriad consumer electronic products. It has seven business segments. Its Sony Creative Software group based in Middleton, WI offers packages for editing and management of photos, audio, and video content, and its ACID software packages for creating music content. In the Knowledge Worker Space In this section we look at the competition for Adobe’’s various offerings targeted at Knowledge Workers. activePDF (Private) Founded in 2000 and headquartered in Mission Viejo, CA, activePDF is a provider of PDF creation, conversion and development tools. The company first addressed the PDF solutions arena with its flagship product, activePDF Server. Additional server- based products soon followed, offering corporate and government clients cost- effective PDF generation and manipulation solutions. activePDF has since built a substantial market presence with over 13,000 customers and approximately 40,000 server and client licenses worldwide. Roughly 40% of activePDF clients are Global 500 organizations, including IBM, Daimler Chrysler, NASA, Harvard University, Warner Bros., Citibank, ACCOR, Deloitte & Touche, Siemens, AXA, L’’Oreal and Proctor & Gamble. Adlib (Private) Founded in 1998 to manage the large volumes of legal information in a high-profile legal case, Adlib offers automated document transformations using PDF as the standard conversion format, allowing customers to reduce the cost of content organization and distribution. Headquartered in Ontario, Canada, Adlib currently has 70 employees serving 5,500 customers. Danaher (DHR, CY10 Industrial Technologies Segment Revenue: $3.2B) Danaher is a major provider of professional, medical, industrial and commercial products and services. In January, 2011, the company acquired Belgium-based EskoArtwork, a provider of design, pre-production, and collaboration software and services for the packaging industry. Through this acquisition, DHR now owns Enfocus, a provider of publishing workflow management applications and various PDF management and editing tools that compete with aspects of Adobe’’s LiveCycle and Acrobat, respectively.52 February 13, 2012
  • 53. Adobe SystemsGlobal Graphics (EBR:GLOG, CY10 Revenue: €€9.6M)Global Graphics develops OEM and white label software for printing and electronicdocuments. Its solutions support PDF, XPS and PCL formats and are embedded inindustry-leading products including digital pre-press systems, copiers, printers,proofing systems and a wide variety of software applications. Customers includeHP, Kodak, Agfa, Canon, Ricoh, Fuji Xerox, Screen, and Quark.Nuance Communications (NUAN, CY10 Revenue: $57.9M)Nuance Communications is generally known as a global provider of voice andlanguage solutions for businesses and consumers. Nuance sells its productsthrough a direct sales force, through its e-commerce Website and through a globalnetwork of resellers and partners. The company offers a range of software thatcompete with Adobe, from of desktop packages that allow users to convert betweenvarious Microsoft Office and PDF formats and vice versa to its more completePaperPort document management solutions that include document sharing,scanning, electronic forms and PDF conversion.Sourcenext (TYO:4344, CY10 Revenue: ¥4B)Founded in 1996, Sourcenext is a Japan-based developer of various consumer andsmall business PC software packages, with a major presence in its domestic market.Its IKINARI PDF Series software is the top-selling PDF conversion software in theJapanese market. The package allows users to convert between various file formatsand PDF, and its COMPLETE edition allows users to directly edit PDF files.February 13, 2012 53
  • 54. Adobe Systems New Segment 2: Digital Marketing This new segment serves an enterprise’’s need to drive marketing programs through digital media channels including websites, mobile and IP TV. Adobe’’s offerings users to analyze digital media traffic and deliver the most appropriate content to maximize the chances of converting a visitor into a paying customer. The Digital Marketing segment includes products from the company’’s Omniture unit, the Day unit and the Enterprise sub segment of the company’’s former Digital Enterprise unit. Its recently-acquired Efficient Frontier digital advertising unit will fold under this segment as well. These units sell software to enterprises primarily for document management, web content management, marketing analytics and collaboration. The Digital Marketing Revenue Segment Digital Enterprise Old Revenue Segment Omniture Enterprise Day New Revenue Segment Digital Marketing Source: Cowen and Company, Company Reports. The new segment will focus on Adobe’’s Omniture web analytics and Day CQ web content management products. These two core products were recently added to Adobe’’s portfolio via acquisition, with Omniture acquired in October 2009 and Day acquired in July 2010. The company also acquired digital ad solution Efficient Frontier, which will complement functionality of these two core products, in January 2012. Note: Management will often use Digital Marketing interchangeably to refer to the entire segment, or just the Omniture plus Day contribution. We refer to Digital Marketing in this note as the full revenue segment. We will call out the core marketing (Omniture plus Day) sub segment explicitly when we refer to these high- growth segments. The declining legacy enterprise component is composed of Web Conferencing and LiveCycle. End Market Opportunity We believe that the broad spectrum of products offered by these units compete in the markets identified by Gartner. • Marketing Automation. These applications allow companies to plan, develop, brand and manage digital marketing campaigns. • Analytic Applications and Performance Management. In the marketing arena, salespeople, marketing professionals and content developers use these54 February 13, 2012
  • 55. Adobe Systems tools to measure the performance of marketing and advertising campaigns, understand user behavior, and measure the impact of content changes.• Business Process Management. Software that helps facilitate, track, analyze and manage business processes performed by company constituents or collaborators.• Enterprise Content Management. Software that manages unstructured content. Within most corporations, this data is typically documents.• Dynamic Web Application Tools. This segment includes tools that support interpreted and dynamic languages, such as Perl, Python, PHP and Ruby. These tools focus primarily (although not exclusively) on combining traditional integrated development environment features with Web design features.• Web Conferencing. These are applications that reduce the need for costly face-to-face interactions by allowing users to cost-effectively interact via the Web on a variety of topics.Together, these markets generate roughly $12B in revenue, with $4B in the segmentsaddressed by Day and Omniture.Adobe believes the following market trends will help drive Digital Marketingrevenue growth.• Broad commercial Internet use. Businesses are investing in the Internet to increase sales, improve customer service, and reduce operating costs. Adobe expects commercial Internet use to continue to increase as broadband and mobile networks are rolled out in emerging geographies, and as formats and channels –– such as mobile, digital video, and social networks –– proliferate.• Need to measure and automate online business. The proliferation of Internet usage and the capture of nearly every user interaction on a Website (or mobile phone app, set-top box, digital kiosks, point of sale system, etc.) have resulted in the creation of an unprecedented customer interaction data. In addition, the emergence of multi-channel marketing initiatives, which combine traditional offline marketing initiatives such as television, print and radio with online marketing initiatives, makes the measurement and analysis of online activity more challenging.• Opportunity to optimize online business. Online marketing can be optimized by analyzing and acting on detailed customer information, such as repeat visits, transactions generated, marketing channels, time and quality of interaction, and conversion and retention rates. Effective analysis can help businesses optimize advertising spend, choice of channels and allocation of marketing personnel and other resources.In addition, we believe that the company can improve the productivity of its salesefforts; thereby improving overall margins as well (p. 37).Customer ProfileCustomers who use Digital Marketing solutions include marketing professionalssuch as the Chief Marketing Officer, marketing managers, online marketingFebruary 13, 2012 55
  • 56. Adobe Systems managers, search engine marketers, media managers, media buyers and marketing research analysts. Customers also include Web content editors, Web analysts and Web production managers. We estimate there are roughly 540K potential users of Digital Marketing’’s Omniture and Day products based on the Bureau of Labor Statistics (BLS) categories shown below. We project this to an audience of roughly 6M potential customers globally based on estimated sizes of the services industry globally relative to the US services industry from the CIA’’s World Factbook.Digital Marketing Core Customers (Omniture + Day) Digital Marketing Target Customers BLS ID Employment (K) Mean Annual Salary Annual Growth Marketing Managers 11-2021 164.6 $122,720 1.2% Advertising and promotions managers 11-2011 32.2 $98,720 (0.2%) Market Research Analysts and Marketing Specialists 13-1161 261.8 $66,850 2.5% Web Developers 15-1179 (subset) 77.9 $79,370 4.4% US Total/Weighted Average 536.5 $87,723 2.2% * Relative Size/Growth of Global Services Sector to US Services Sector 11.8 Estd Number of Omniture Target Customers, World Wide (K) 6,327.3 Source: Cowen and Company, Company Reports, Bureau of Labor Statistics, Central Intelligence Agency World Factbook. Our estimates above suggest the Digital Marketing target audience in aggregate is growing at 2.2% in the US based on BLS data. We scale for a global market estimate using the relative sizes of the US and global services sectors as we believe the majority of these individuals are not directly employed by goods-producing firms (e.g., freelance or employed by services firms like IT providers), so we believe this provides a more accurate estimate for worldwide employment in these job functions. We note that there are other products in this segment such as LiveCycle (document management) and Connect (conferencing/collaboration) that are potentially usable by virtually every employee at a corporation. However, we do not break these users out due to the de-emphasis of these product families. Products The Digital Marketing segment includes products from the company’’s former Omniture unit and the Enterprise sub segment of the company’’s old Digital Media unit. In this section, we list the products of each of these units. We note that while the products listed below are likely to be assigned to this new segment, the company has not yet finalized the fine-grain details of the re-segmentation. Given the large number of products, we have broken the lists up by their former segment assignments. Adobe has not yet provided product assignment/integration details for Efficient Frontier’’s products, so we have not listed them in this section. Former Segment: Omniture These products capture, store and analyze information generated by customer websites and other sources. Customers use this data to evaluate and analyze the performance of marketing and sales initiatives and other business processes, and then optimize advertising spend across digital advertising channels, deliver targeted content on the Internet and conduct tests to identify and improve revenue opportunities. 56 February 13, 2012
  • 57. Adobe SystemsOmniture Products Product Description Advertising Optimization AudienceManager AudienceManager manages digital data assets enterprise-wide to help analyze and understand audiences and enable the most relevant and accurate data to drive digital marketing. Leading advertisers successfully use these capabilities to collect data from first-, second-, and third-party data sources and then combine these attributes to identify high-value audience segments. SearchCenter+ Hosted software which provides a common interface to manage search campaigns across multiple search and social media channels, integrate campaign metrics with Web analytics, and optimize across marketing programs. Enables search and social marketing to occur in the context of a broader marketing plan so that users can improve brand engagement and online conversions. Adobe intends to extend this products functionality with assets from recently-acquired Efficient Frontier. Conversion Optimization Merchandising Hosted software which enables retailers to implement online merchandising strategies to increase conversions and average order value. Helps online businesses improve shoppers’’ ability to find and select products, as well as promote products based on business goals and metrics. Publish On-demand web content management solution that enables business users to easily create, manage and update web content without the need of developers. Recommendations Hosted software which enables businesses to promote products and content online. Utilizes flexible data and behavioral driven algorithms to ensure relevant choices are automatically presented to customers, either on Websites or through email campaigns. Scene7 Web-based visual merchandising system to upload, manage, enhance and publish dynamic rich content. Used by many leading online retail Websites to automate the production and availability of rich media experiences, including zoom, dynamic sizing, personalization and interactive dynamic product catalogs. Search&Promote Website search and merchandising application that helps marketers anticipate visitor search intent and promote the most relevant products and content across Web and mobile site searches. Provides flexible search and navigation interfaces, social browsing, sort and filter options, refinements based on multiple facets such as color, gender and customer ratings, an advanced marketer console to monitor conversion metrics and paths, and a visual rule builder to manage promotions. Test&Target SaaS solution that allows users to rapidly design and execute tests, create audience segments and target content. Gives marketers the capabilities to make their online content and offers more relevant to their customers, yielding the potential for greater customer conversion. Test&Target 1:1 Similar to TestTarget, but marketers can automatically target individual site visitors rather than pre- defined visitor segments. Online Analytics Discover Hosted software which provides users such as analysts and online marketers with real-time visitor information and insight. Enables businesses to understand a comprehensive, multi-dimensional view of their customers through accurate and timely information such that they can make informed decisions to improve the performance of their business. SiteCatalyst Adobes core Omniture business product offering, SiteCatalyst is a SaaS solution that provides customers and users such as marketers the ability to capture, store and analyze information generated by their websites and other sources and visualize this information via charts, graphs and dashboards. Allows users to evaluate and analyze the performance and efficiency of marketing and sales initiatives and other business processes. SocialAnalytics Enables marketers to directly measure their social media efforts, and understand how conversations on social networks and online communities influence marketing performance. Using SocialAnalytics, marketers can manage their strategy and investments in social media based on measurable outcomes and in the context of broader, multichannel marketing efforts. Survey SaaS solution which helps organizations design, create and implement online surveys to measure audience sentiment. Multi-Channel Analytics Insight On-premise software which enables organizations to quickly analyze large volumes of rapidly evolving data in real-time. Provides users with charting and visualization capabilities to assist them with making quick business decisions that can improve overall business performance. Accepts data from any source, including data warehouses and business intelligence tools. Insight for Retail On-premise software which provides organizations with rapid customer insights using real-time analysis of large volumes of continuously changing point-of-sale, kiosk and inventory data. Helps users correlate data to online interactions for a deeper understanding of customer responses across multiple channels. Omniture Open Business Analytics Platform Closed-loop Marketing On-demand analytics package that allows marketers to measure the ROI of their programs across online and offline channels. Allows users to quantify details including ad impressions, page views, clicks, leads, sales, opportunities, closed deals, and associated revenue. Pre-integrated with DataWarehouse Contains the information captured by Adobe SiteCatalyst, Adobes core Omniture business product offering, and other Omniture business applications. Genesis APIs that integrate and augment analytics data with relevant data from Internet and enterprise applications and data from a growing number of online and offline channels. TagManager Houses tags (a small piece of code, usually JavaScript, used to capture anonymous audience data) from solutions within the Digital Marketing Suite as well as third-party, tag-based marketing and advertising technologies. Facilitates the rapid deployment audience data capture by eliminating the need to make changes to the code on a page. Source: Cowen and Company, Company Reports. February 13, 2012 57
  • 58. Adobe Systems Omniture’’s solutions are anchored by its flagship product, SiteCatalyst, which represented more than 50% of the segment’’s revenue in FY11. The solutions in the segment are broken up into five product families, with one or more products each as shown in the preceding table. Former Segment: Enterprise (Sub Segment of Digital Enterprise) The emphasis of Adobe’’s former Enterprise segment is shifting from its LiveCycle and Connect (Web Conferencing) products to its Communiqué (CQ) web content management product, a recent addition via Adobe’’s October 2010 acquisition of Day Software that contributed an estimated $100M to revenue in FY11. Day CQ helps customers deploy content on open source user interface technologies including XML, HTML and Ajax, as well as deployment on Adobe’’s Flash, AIR and PDF formats. Day CQ and its related applications can distribute this content in multiple communication channels, including the Internet, mobile and social channels Product details are below. Pricing is generally not available for these products as these are intended for purchase by corporations, and are generally not purchased by individuals, unlike many of Adobe’’s other products which are purchased by both types of entities.58 February 13, 2012
  • 59. Adobe SystemsEnterprise Segment ProductsProduct DescriptionSubscription Services Connect Web-based conferencing solution consisting of a core Connect Events Server or hosted service, and modules that provide specific application functionality, including Connect Training and Connect Events. Connect Training allows organizations to build an online training system with Microsoft PowerPoint presentations that can include surveys, analysis, course administration and content management. Connect Events allows users to conduct business presentations, seminars and training sessions through the Web. CQ Web content management, digital asset management, and social collaboration platform that enables interactive marketers to manage the online marketing channel. CRX An open scalable standards-based Enterprise Content Management platform. LiveCycle Collaboration Service Enables developers to embed real-time collaboration features into Internet applications. Hosted service allows customers to offload management and processing for features such as chat, video, VoIP and white-boarding. Use cases include guided product or service selection, assisted product design or enhanced customer support. LiveCycle Content Services A library of services that can be used with other LiveCycle components to create content-rich applications that allow end users to collaborate on content development as part of a company’’s business processes. Services include a repository that supports document check-in/check-out and keeps a complete audit history of document actions, and collaboration tools such as forums and discussions. Includes plug-ins for Microsoft Word and Excel that enable users to interact with the process engine and content repository. LiveCycle Data Services Framework that streamlines the development of rich Internet applications using Flex and AIR. Simplifies creation of server-based and real-time applications. Simplifies data management problems such as tracking changes, synchronization, paging and conflict resolution. LiveCycle Managed Services Managed services offering delivered in partnership with Customers pay Adobe an annual subscription fee to provision and manage a LiveCycle instance on Amazon Web Services.Server and Desktop Applications LiveCycle Connectors for ECM Enable customers to connect their LiveCycle applications with other enterprise content management systems, such as EMC Documentum, IBM FileNet and IBM Content Manager. LiveCycle Mosaic Internet application framework for rapidly assembling enterprise applications from individual tiles. Developers expose their logic and user interfaces into application tiles that can be assembled in Mosaic to create a single user interface. LiveCycle Designer Desktop application which simplifies the creation and maintenance of XML forms for deployment as PDF, HTML or Flash based forms. Provides a graphical design tool for creating XML templates and previewing them before deployment. Simplifies adding intelligence to documents, such as business and routing logic, and integrating with enterprise applications. LiveCycle Forms Server-based software that organizations use to securely extend their core business processes beyond their enterprise system. Customers can create and deploy XML-based form for use with Adobe Reader, Flash Player, or Web browsers. Provides for the capture of data from these forms directly into an organization’’s core business systems, thereby streamlining form-driven business processes. LiveCycle Reader Extensions Server-based application which lets enterprises share interactive PDF documents with external recipients using Adobe Reader, without requiring recipients to purchase Acrobat software that normally would be necessary to interact with the PDF documents they receive. End users have access to tools that normally would not be available in Adobe Reader, such as reviewing and commenting functions, forms, digital signatures, embedding file attachments, and saving electronic documents locally. LiveCycle Output Server-based solution which supports on demand generation of documents such as correspondence, confirmations, bids, or shipping labels. Able to merge XML data from back-end systems with LiveCycle Designer templates to generate documents in various formats. Customers can combine newly generated PDF documents with existing files from document repositories, and convert PDF documents to print or image file formats and then route them for server-based printing or archiving. LiveCycle PDF Generator Server-based software which automates the creation, assembly, distribution and archival of PDF documents. Converts a wide range of file formats, and can combine newly created PDF documents with existing files or pages to assemble customized PDF packages. Supports direct server-based PDF LiveCycle Production Print Server-based solution that performs high-volume generation of documents such as statements, invoices, etc.. Merges data from back-end systems with LiveCycle Designer templates to generate documents in a broad range of print or electronic formats. LiveCycle Digital Signatures Server-based application that automates the processing of electronic documents by providing batch- based capabilities to digitally sign and certify PDF documents, validate digital signatures and encrypt/decrypt PDF documents. Integrates with existing public key infrastructures. LiveCycle Rights Management Helps organizations manage information access securely with dynamic, persistent document control. Allows for access control and auditing of PDF, Word, Excel, PowerPoint, PTC Pro/ENGINEER, Dassault CATIA and Lattice XVL CAD document usage inside or outside the firewall, online or offline, and across multiple document platforms. Informs organizations when a document has been viewed, printed or altered and restricts access so that only intended recipients can open, use and forward a document. LiveCycle Process Management Server-based process management application that allows organizations to coordinate people, systems, content and business rules into end-to-end processes that are accessible to participants online or offline. Provides out-of-box dashboards to help users gain insights into business operations in real time and management tools to fix day-to-day operational problems and make long-term process improvements. LiveCycle Business Activity Monitoring Allows administrators and process participants to quickly identify bottlenecks, check progress and view other process information related to business transactions. Allows for the monitoring of all LiveCycle processes inside and outside the LiveCycle environment with out-of-the-box dashboards. Central Pro Output Server Server-based software for document generation that allows organizations to create personalized, customer-facing documents from any data source, including legacy, line-of-business, ERP or CRM applications. Merges data with an electronic document template to dynamically generate electronic documents such as purchase orders, invoices, statements and checks for delivery via PDF, the Web, e- mail, fax or print. Output Designer Design tool that allows users to create electronic document templates for use with Adobe solutions for document generation. Output Pak for SAP-certified server-based application that allows customers to create and maintain documents for SAP. Can extract data directly from SAP, which can then be merged with a document template that defines layout and formatting, to be output into a variety of formats, including PDF, print, fax, e-mail and the Web. Web Output Pak Server-based software application for document generation. Creates documents in PDF and HTML for presentation on the Web and in Wireless Markup Language for presentation to a wireless device. Allows users to personalize and control the look of documents based on the data the documents contain. Source: Cowen and Company, Company Reports.February 13, 2012 59
  • 60. Adobe Systems Revenue and Sensitivity to the Macro Environment Historical Revenue: Even Subscription Revenues were affected by the Downturn The following shows revenue from the Digital marketing sub segments over the last six years and the corresponding 5-year CAGR. Digital Marketing Annual Revenues ($M) $1,000 $900 $800 $700 $600 $577 $402 $500 $294 $279 $400 $300 $143 $80 $200 $337 $286 $298 $333 $100 $197 $240 $0 FY06E FY07E FY08A FY09A FY10A FY11A Old Structure: Enterprise Old Structure: Omniture New Structure: LiveCycle and Web Conferencing New Structure: "Core" Digital Marketing Source: Cowen and Company, Company Reports. FY06 and FY07 Omniture revenues are calendar year (one month off) revenue from Omniture, prior to its acquisition by Adobe Although this segment has grown at a robust 27% CAGR over five years, Digital Marketing as a whole (as with the rest of Adobe) is ostensibly not insulated from macroeconomic downturns. Total revenue for the segments shrank in FY09, despite what we estimate was a $10M revenue contribution from acquisitions. Over the last two years, the ““core”” Digital Marketing unit’’s revenue, which is primarily subscription based, has typically increased quarter by quarter. The legacy enterprise business (LiveCycle and Web Conferencing) varied quarter-to-quarter with an expected high in the fourth quarter, consistent with the license/direct sales model of many of its major LiveCycle product.60 February 13, 2012
  • 61. Adobe SystemsDigital Marketing Segment Revenues by Quarter ($M) $300.0 $250.0 $200.0 $167.1 $150.0 $114.4 $130.8 $140.7 $99.8 $137.9 $96.0 $91.8 $100.0 $50.0 $91.1 $95.8 $102.7 $77.1 $73.3 $82.1 $74.4 $73.8 $0.0 1Q10A 2Q10A 3Q10A 4Q10A 1Q11A 2Q11A 3Q11A 4Q11A Legacy Enterprise (LiveCycle and Web Conferencing) "Core" Digital Marketing (Omniture and Day) Source: Cowen and Company, Company Reports.The Consistency of Sales and Marketing SpendOverall, Adobe’’s sales and marketing spend is 30% of revenue. The acquisition ofOmniture had negligible effect on this allocation despite significantly increasing thesize of the Digital Marketing segment. Given this consistency in S&M spend, andgiven that Omniture’’s S&M spend prior to its acquisition used to be about 50% ofrevenue, we infer that the segment’’s S&M spend is at least 30% of revenue.S&M Expenses Unfazed by Acquisitions at 30% of Total Revs 40% Omniture acquired Day acquired 35% 31.3% 31.0% 31.3% 30.5% 30.2% 29.7% 30.2% 28.8% 30% flat sales and marketing outlay thru OMTR and Day acqs 25% 20% 15% 10% 5% 0% FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 Fiscal Year Source: Cowen and Company. Company Reports.February 13, 2012 61
  • 62. Adobe Systems Go to Market Strategy Historically, Adobe primarily sold its Omniture and Enterprise sub segment solutions directly to marketing and IT departments with separate sales forces. The company is increasingly seeing demand for a unified marketing product, so in order to minimize sales channel conflict, the company combined its Omniture and Enterprise direct sales forces into a single sales force. In conjunction with this, the company is increasingly investing into R&D to integrate its Omniture and Day products along with its Digital Media content creation products to bring a unified marketing suite to customers. This initiative for a unified digital marketing solution accelerates an initiative by the company to broaden the digital marketing offering beyond Omniture’’s core SiteCatalyst product. The company has had success in this area over the last two years, growing non-SiteCatalyst revenue in the Omniture segment roughly 35%. SiteCatalyst Revenue Breakout $200 44% 50% 35% 35% $180 31% 40% $160 30% $140 13% 11% 20% Revenue ($M) 6% Growth (%) $120 2% 10% $100 $64 0% $58 $59 $59 $80 $58 -10% $57 $52 $56 $60 -20% $40 -30% $57 $59 $67 $44 $51 $53 $20 $39 $40 -40% $0 -50% 1Q10A 2Q10A 3Q10A 4Q10A 1Q11A 2Q11A 3Q11A 4Q11A Other Omniture Revenue SiteCatalyst Revenue Other Omniture Revenue Growth SiteCatalyst Revenue Growth Source: Cowen and Company, Company Reports. Adobe is funding the sales and marketing push for Omniture and Day by reallocating sales and marketing spend from its Web Conferencing (Connect) and enterprise content management (LiveCycle) products, except in these products’’ key financial services and government vertical markets. Adobe expects this reallocation of S&M spend to reduce legacy enterprise revenue by approximately $150M. Adobe also leverages sales and consulting delivery through its systems integrator partners, including Conference Service Providers for Adobe Connect. Competition In this section, we go into detail on the segment’’s broader-based competition and its competition in its core Digital Marketing units (Omniture and Day). We also provide a summary of point product competition for its legacy enterprise units.62 February 13, 2012
  • 63. Adobe SystemsBroad-based Digital Marketing CompetitionThese companies compete with one or more of the offerings in Adobe’’s DigitalMarketing segment.Accenture (ACN, CY10 Net Revenue: $22.4B)Global management consulting, technology services and outsourcing companyAccenture entered the online marketing analytics market with the 2008 acquisitionof online testing and targeting technology firm Memetrics and website optimizationfirm Maxamine. Today, Accenture Interactive offers services covering all aspects ofdigital consulting, marketing analytics, and media management. Its methodologiesand assets aim to enable closer interaction between the marketing and technologyfunctions, so that visitors to customer’’s digital properties are presented withcontent tailored to their specific intent, leading them through the conversion funnel.Acxiom Digital (ACXM, CY10 Revenue: $1.1B)Founded in 1969, Acxiom is primarily known as a provider of digital marketingservices. It acquired Kefta in 2007, a tool for multivariate testing of pages, formsand offers.Alfresco (Private)Alfresco develops and markets its open source collaboration, documentmanagement and web content management software. Its software also supportsgovernance, compliance and retention (GRC) needs and provides a documentmanagement platform that customers can use to develop content rich applicationsand websites. Alfresco has over 2,200 customers in 55 countries, including HomeDepot, Michelin and the New York Philharmonic. Alfresco was founded in 2005 andits investors include Accel Partners, Mayfield Fund and SAP Ventures.Autonomy (LSE:AU, CY10 Revenue: £561.5M)Autonomy Corporation sells and markets software which allows computers tounderstand information that is still in human-friendly form, such as email, Webpages and documents, automatically processing these documents with little or nothuman intervention. Its primary Intelligence Data Operating Layer (IDOL) productcan serve as a basis for applications such as its Interwoven content managementand business process management that compete with Adobe’’s Day and LiveCycleofferings. Autonomy’’s Optimost product line competes with Adobe’’s Test&Targetproducts, while its suite of search products competes with Adobe’’s SiteSearchsolutions. Autonomy is in the process of being acquired by HP for $10.3B.Celebros (Private)Founded in 2000 and headquartered in New Jersey, Celebros offers website search,search-centric merchandising, a mobile store platform, and analytics. The companyhas more than 300 customers in 11 countries, including SkyMall, T-Mobile Online,CHL, Hammacher Schlemmer, and 13, 2012 63
  • 64. Adobe Systems Fredhopper (SDL subsidiary) Headquartered in Amsterdam, Fredhopper’’s technologies allow online marketers to systematically improve targeting content to the right person at the right time. Fredhopper offers software products for website search, product targeting and targeted advertising. Fredhopper has over 100 online retailer customers including Albert Heijn, Bijenkorf, B&Q, Clarks, Otto, Thomas Cook, Toys R Us and Waitrose. Analysts rate Fredhopper as No.1 in its sector. Google (GOOG, CY10 Revenue, ex-TAC: $22.0B) The world’’s dominant search advertising provider, Google competes with Adobe on several fronts. Its hosted search products compete with the Adobe SiteSearch offering. Google offers a Web analytics service free of charge, and acquired online ad service DoubleClick in 2008. IBM (IBM, CY10 Software Revenue: $22.5B) One of the largest global enterprise IT providers delivers integrated solutions that combine hardware, software and services. IBM’’s Software segment is the second largest provider of enterprise software and competes with Adobe’’s offerings along many fronts. Its Lotus Sametime product competes with Adobe Connect while its FileNet, Lombardi, and Lotus Workplace Forms solutions compete with various aspects of Adobe’’s LiveCycle suite and CRX content management offerings. Its Project Northstar customer experience management offering competes with Adobe CQ. IBM recently acquired Coremetrics to extend its e-commerce and web analytics and Unica to extend their digital marketing offering. These two product sets broadly compete with the combined CQ and Omniture offerings. IgnitionOne (Private) IgnitionOne provides a closed loop Digital Marketing Suite, offering multiple solutions to improve online performance within a single interface, including ad management and optimization (search, display and Facebook), cross-channel attribution and website conversion optimization. IgnitionOne currently drives more than $20B in revenue each year for some of the worlds leading online marketers, including General Motors, Chicos, Ann Taylor, Fiat and advertising agencies such as MRM Worldwide, CyberAgent and more. Infor (Private) With 70,000 customers worldwide generating over $2.5B in revenue, Infor is the third-largest provider of enterprise applications software in the world. The company sells its Interaction Advisor as part of its Epiphany CRM suite. This package helps improve clients’’ audience-to-paying customer conversion rates, cross-selling and improve customer retention by allowing users to analyze and coordinate actions and content across multiple business units and marketing channels, including point of sale systems, websites, email and mobile. Microsoft (MSFT, CY10 Server and Tools Software Revenue: $14.1B) The world’’s largest software company has offerings that compete with Adobe’’s Acrobat and Connect products. Furthermore, MSFT offers much of the collaboration functionality touted in Adobe LiveCycle such as forms and digital rights64 February 13, 2012
  • 65. Adobe Systemsmanagement that are integrated into Office, SharePoint and Windows Serverofferings. MSFT’’s FAST Search and Transfer ASA products compete with Adobe’’sSiteSearch product. Microsoft offers a Web analytics service free of charge, andoffers Microsoft Advertising, which is based on their 2007 acquisition of aQuantivethat competes with Adobe’’s digital advertising business. Its alliance with Yahoo!further strengthens its position in the advertising space.Nextopia Software (Private)Toronto-based Nextopia has been providing specialized Internet search productsand services since 1999, delivering advanced-and affordably priced-informationretrieval technology for businesses and online retailers. It offers site search forclient’’s websites that leverage customer search and purchase behavior analysis toimprove product merchandising. It also offers search engine optimization tools tohelp drive customer traffic. Nextopia has more than 1,100 customers, including AbtElectronics, Crabtree & Evelyn, iGourmet, La Senza, Playboy, Rock Bottom Golf,Tackle Direct, and Vintage Tub & Bath.OpenText (OTEX, CY10 Revenue: $937.7M)OpenText is a provider of enterprise content management solutions. Its flagshipOpenText ECM Suite competes with Adobe LiveCycle and it began competing withAdobe’’s Day software offerings when it acquired Web Content Management providerVignette in 2009.Oracle (ORCL, CY10 Technology Software Revenue: $15.4B)Enterprise software provider Oracle produces a range of tools for managingbusiness data, supporting business operations, and facilitating collaboration andapplication development. Oracle also offers business applications for datawarehousing, customer relationship management, supply chain management, andmore. The company entered the document management space with its acquisitionof Stellent in December, 2006. At the time, Stellent had annual revenues of $120M.Oracle also acquired FatWire, a provider of web content management software inJune 2006. Oracle’’s recent Endeca acquisition (October 2011) provides the companywith site search and merchandising technology.SLI Systems (Private)SLI develops learning-based search and navigation technology for publishers,ecommerce and corporate sites. SLI Systems’’ hosted site search and user-generatedSEO solutions help site visitors find the products and information they seek asquickly and efficiently as possible. SLI also offers a dynamic navigation system thatallows customers to group products together for more effective merchandising andan e-commerce site search product for sites that require more advanced productmerchandising. In addition, SLI offers a search engine optimization (SEO) serviceaimed to drive more online traffic by optimizing pages to increase a site’’s ranking inkeyword searches. Today, SLI serves more than 300 customers, including ULTA,Vermont Teddy Bear, New England Journal of Medicine, Harry and David, NorthwestRiver Supplies, and FTD.February 13, 2012 65
  • 66. Adobe Systems Webtrends (Private) Webtrends’’ software is used by its customers to analyze the use of their websites, including who is visiting, what pages are viewed most, how visitors are monetized, security and when problems are about to occur. The company also offers World paid search and Facebook advertising management and optimization. Webtrends serves 3,500 customers around the world, including Reuters, Barclays, BMW, China Mobile, Coca-Cola, Guess, UPS, Microsoft, Philippine Airlines, and Toshiba. The company is owned by Francisco Partners. [x+1] (Private) Founded in 1999, [x+1] provides a suite of applications that analyze and manage inbound interactions on websites and digital outbound communications. Its products manage media buys and personalization websites in an attempt to provide the optimal mix of offers and content to site visitors, with analytics to improve media and site programs individually and in conjunction with each other. Yahoo! (YHOO, CY10 Revenue, ex-TAC: $4.6B) YHOO offers a broad inventory of web properties to advertisers that want to reach specific target audiences. It offers these advertiser customers a range of marketing services designed to reach and connect with users of its web properties and beyond, through a distribution network of third-party entities that have integrated its advertising offerings into their websites or other offerings. YHOO also offers a Web analytics service from its 2008 acquisition of IndexTools Digital Marketing Analytics These companies provide solutions that compete with Adobe’’s web analytics offerings, primarily SiteCatalyst. Some of these analytics systems also provide for integration to content management systems so that customers can optimize how their products are merchandised in their digital properties. Aggregate Knowledge (Private) SaaS provider Aggregate Knowledge delivers campaign and audience analytics to support large advertisers in their digital media decisions. Its AK Media Intelligence Platform provides campaign analytics with audience data mining and multi-touch attribution across display, search, mobile, social, video, and IPTV channels to advertisers, agencies, ad networks, and publishers. Nielsen (NLSN, CY10 Revenue: $5.1B) Nielsen helps clients understand consumer behavior by providing media and marketing information, analytics and industry data and expertise about what consumers buy and what media they consume in multiple channels, including television, online and mobile, on both a global and local basis. Its online data is based on the recorded behavior of an online consumer panel composed of 200K users across 30K websites. Given the generic and broad reach of this panel, we believe Nielsen’’s data and services are currently more of an alternative rather than a direct competitor to Adobe’’s marketing applications that gather and analyze client- specific data, and that Nielsen may occasionally complement Adobe’’s offerings.66 February 13, 2012
  • 67. Adobe SystemscomScore (SCOR, CY10 Revenue: $175M)comScore provides a digital marketing intelligence and measurement platform thataid its customers’’ decision making process and help them implement more effectivedigital business strategies. comScore periodically provides customers with detailedinformation regarding consumer usage of their online properties and those of theircompetitors, married with information on consumer demographics and offlinebehavior. The foundation of comScore’’s platform is data collected from its panel ofapproximately 2M Internet users worldwide. Introduced in 2008, SCOR’’s MediaMetrix blends panel data and a customer’’s online data to periodically provide a linkbetween these two collected data sets. The company expanded its digital analysisportfolio through the 2010 acquisitions of mobile network analysis provider Nexiusand web analytics & video provider Nedstat.Prosodic (Private)Prosodic is a social media predictive analytics and content intelligence platform forlarge brands, agencies and publishers. Prosodic’’s software solution providesanalytics and content intelligence in real-time. The company was founded in 2011and is headquartered in Seattle, WA.Web Content ManagementThese compete with Adobe’’s Communiqué offering which it obtained through itsacquisition of Day. While related to enterprise content management, web contentmanagement is specifically concerned with delivering digital content to customers’’audiences typically with the objective of driving as much revenue from theseaudiences as possible.CoreMedia (Private)Established in 1996 and headquartered in Hamburg, Germany, CoreMedia is aprovider of web content management (WCM) software that allows customers todeploy context-driven online experiences to audiences across multiple channels,such as the Web or social media outlets. CoreMedia’’s clients include the AustralianBroadcasting Corporation, Bertelsmann, Daimler, NEC, Panasonic, Samsung and T-Mobile.Percussion (Private)Percussion develops and markets XML-based web content management (WCM)systems that compete with Adobe CQ. It has two product lines: CM1, whichemphasizes ease of deployment and is sold to smaller teams, and CM System whichis meant for large scale web environments. Customers include, VirginiaTech University, Kohls, TiVo,, and INGDirect.SDL (LSE:SDL, CY10 Content Management Technologies Segment Revenue:£45.0M)SDL provides content management and translation software and solutions tomultinational enterprises. SDL’’s Content Management Technologies segmentmarkets document and web content management technologies. The company alsomarkets online marketing execution software. SDL has over 1,500 enterpriseFebruary 13, 2012 67
  • 68. Adobe Systems customers, including Unilever, Atmel, Affinion, Fidelity Investments, Saab, and United Airlines. Zinio (Private) Founded in 2001, Zinio is a publishing SaaS company, which provides sales and distribution of printed material in digital format including magazines, books, catalogs, newsletters and research Zinio users download millions of magazine issues a month in 33 languages and 20 currencies, from almost every major global publisher including Alpha Media Group, Bonnier Corporation, Hachette Filipacchi Media, Hearst Corporation, IDG, Omnimedia, McGraw-Hill, Playboy Enterprises, Rogers Publishing, Source Interlink Media, The Economist, Transcontinental, Wiley and Ziff Davis. Zinio is headquartered in San Francisco with offices in New York, London, Paris, Barcelona and Taipei. Open Source Projects Adobe also has competition for its CQ package from open source web content management projects Drupal, Joomla! and WordPress. Digital Advertising These companies provide solutions that manage advertising campaigns for customers on multiple digital ad networks and search providers. Their products broadly compete with Adobe’’s Efficient Frontier and SearchCenter+ advertising solutions. Clickable (Private) Founded in 2006 in New York City by David S. Kidder and Munish Gandhi, Clickable’’s offerings help customers reduce the time and complexity of managing multiple ad networks, such as Google, Bing and Facebook. Clickable is powered by dedicated search and social advertising specialists, along with award-winning PPC bid management and conversion tracking technology. Clickable investors include FirstMark Capital, Union Square Ventures and The Founders Fund. Kenshoo (Private) Kenshoo engineers technology solutions for search marketing, social media and online advertising. Advertisers, agencies and marketing providers use Kenshoo Enterprise, Kenshoo Local and Kenshoo Social to direct more than $15B in annual customer sales revenue. Kenshoo is used by 6 of the top 10 hotel groups, 7 of the top 10 retailers, 7 of the top 10 telecoms, 9 of the top 10 ad agency networks, and 23 of the Fortune 50 companies. Kenshoo customers include Barnes & Noble, CareerBuilder, Facebook, Hitwise, LendingTree, Sears, Starcom MediaVest Group, Travelocity, Walgreens, and Zappos. Kenshoo is backed by Sequoia Capital and Arts Alliance. Marin Software (Private) Founded in April 2006 by seasoned digital marketing and enterprise software professionals, Marin Software provides a leading online advertising management platform for advertisers and agencies to manage their paid search, social media, display advertising, and mobile campaigns. Marin Software’’s bid management and68 February 13, 2012
  • 69. Adobe Systemspay-per-click tools help customers optimize activity across the online sales funnel,generating more conversions while saving time and reducing costs. Over 800companies, including many of the world’’s largest interactive agencies andadvertisers, rely on Marin Software’’s platform to manage more than $2B of annualmarketing spend globally. Leading advertisers using Marin include Razorfish,Neo@Ogilvy, University of Phoenix, Macy’’s, PriceGrabber, (CRM,Underperform) and Reply. Marin Software is funded by Amicus Capital, BenchmarkCapital, DAG Ventures, Focus Ventures, and Crosslink Capital with headquarters inSan Francisco, California and offices in London, New York, Chicago, Shanghai,Singapore, Hamburg, Paris and Sydney.24/7 Real Media (Subsidiary of WPP, ADR:WPPGY, NC, CY10 Revenue £9.3B)WPP PLC provisions communications services on a national, multinational and globalbasis. Founded in 1995 and acquired by WPP in 2007, WPP’’s 24/7 Real Mediasubsidiary provides digital marketing strategy and technology solutions toadvertisers, agencies, and publishers around the world. The company’’s products,including the Open AdStream ad management system and its Global Web AllianceMedia network, serve billions of advertising impressions every month all over theworld.Channel AnalyticsAdobe’’s Insight product allows companies to analyze large volumes of data comingin through a digital channel in real time. Direct competitors include Truviso,Clickfox and Qliktech and applications that can be supported by Big Data providerssuch as Teradata’’s AsterData subsidiary (TDC, CY10 Revenue: $1.9B) and Hadoop.RecommendationsRecommendations products enable businesses to promote products and contentonline by attempting to personalize content to the visitor. Point competitors toAdobe’’s Recommendations product include Baynote, Certona, Rich Relevance andAmadesa.SurveyAdobe’’s Survey product helps enterprises design, create and implement onlinesurveys. Its competition includes survey providers OpinionLab, iPerceptions andForesee Results.Web Conferencing/CollaborationAlthough not currently a focus of the Digital Marketing segment, Connect falls underthe Digital Enterprise segment. Its primary competitors include Cisco’’s WebEx unit(CSCO, CY10 New Products Segment Revenue: $12.3B), Citrix’’s GoToMeeting products(CTXS, CY10 Online Services Revenue: $361M), and Microsoft’’s Live Meeting offering.Enterprise Content ManagementAs with collaboration, Enterprise Content Management (ECM) is not currently a focusof the Digital Marketing initiative, but LiveCycle is still a part of this segment. Inaddition to previously mentioned ECM solutions from the more broad-based AdobeFebruary 13, 2012 69
  • 70. Adobe Systems competitors, competing products are offered by EMC (EMC, CY10 Revenue: $17.0B), Pegasystems (PEGA, CY10 Revenue: $336.6M), and Ultimus.70 February 13, 2012
  • 71. Adobe SystemsSegment 3: Print and PublishingAdobe’’s Print and Publishing business segment contains several of its matureproducts and services which address diverse market opportunities includingeLearning solutions, technical document publishing, Web application developmentand high-end printing. The group is of historical significance to Adobe in that thecompany was essentially started with the Postscript printer language for which thisunit is the steward. What began as a proprietary printer language (ironically madepopular by Apple’’s printers) is today an open standard adopted by higher-endprinting solutions.End Market Opportunity and CustomersBased on IRS corporate tax returns, there are roughly 30K publishing firms in the US.We believe that eLearning solutions are broadly applicable to the 6M totalcorporations in the US. We have sized the Web application development market inour assessment of Knowledge Workers (p. 39).ProductsPrint and Publishing offers a diverse set of products including eLearning solutions,technical document publishing, Web application development and high-endprinting.February 13, 2012 71
  • 72. Adobe SystemsPrint and Publishing Products List Prices (September 2011) Purchase Upgrade Annual Subscription Monthly Product Description Price Price Price Subscription Price Captivate Enables users to rapidly create eLearning content - including software simulation, quizzes, animation $799 $149 $468 $59 and multi-media - and deliver the content in Adobe Flash and other formats. The content can be created without any programming or multi-media skills and can be published to CD/DVDs and Learning Management Systems used in training, sales, marketing and customer support applications. Often used in combination with Adobe Connect. ColdFusion Standard Provides a server-scripting environment and a set of features used by organizations for building $1,299 $649 database-driven scalable applications that are accessible through Web browsers, Adobe Flash Player and Adobe AIR; built on an open Java technology architecture and can be deployed on third-party Java application servers that support the J2EE specification. ColdFusion Enterprise Adds features for creating and deploying enterprise-scale applications to ColdFusion Standard, such as $7,499 $3,750 a management console for managing deployments across multiple servers and ability to control page caching. ColdFusion Builder New development tool for building ColdFusion applications; provides a unified, customizable and $299 $109 extensible development environment to code applications, manage servers and deploy projects. Contribute An easy-to-use tool to update and publish Web content, designed for non-technical business users who $199 $99 need to make minor changes to intranet and Internet Websites that conform to the structure, style, layout and site standards setup by a Website administrator; streamlines the Web content maintenance process and provides Website administrators with a set of simple content management functionality to manage and administer Websites; also provides bloggers with a simple tool to create and update their blogs. Director A tool for creating professional multimedia content that combines images, text, audio and video into $999 $299 presentations, interactive experiences and prototypes; for Websites, it provides users with the ability to deliver multimedia content that supports three dimensional content and animations for use in various markets, including education, games and commerce; also enables the creation of fixed-media content for CD titles and DVD titles in the entertainment, education and corporate training markets. eLearning Suite A set of software for creating professional eLearning courseware; includes capabilities of Captivate, $1,799 $399 $1,068 $135 Flash Professional, Dreamweaver, Photoshop Extended, Acrobat, Presenter, Soundbooth, Bridge and Device Central CS5. Font Folio Contains more than 2,200 typefaces from the Adobe Type Library in OpenType format, offering a type $2,999 $189 solution for print, the Web, digital video or electronic documents; also includes Adobe Type Manager which makes it easy to create beautiful text for print, Web and video projects. FrameMaker An application for authoring and publishing long, structured, content-rich documents including books, $999 $399 documentation, technical manuals and reports; provides users a way to publish their content to multiple output formats, including print, Adobe PDF, HTML, XML and Microsoft Word. FrameMaker Server Extends the capabilities FrameMaker software in an automated, server-based environment; includes $14,999 $7,499 features that facilitate high-volume publishing, including catalog, database, and directory publishing, as well as the production of personalized technical documents and custom eBooks. FreeHand MX A professional vector graphics tool designers and illustrators use to create high quality images that $399 $99 can be scaled; supports developing images for print, the Web and Adobe Flash Player. PageMaker Software used to create high-quality documents simply and reliably with robust page layout tools, $499 $79 templates and stock art. Being phased out in favor of InDesign. RoboHelp An easy-to-use authoring tool used by developers and technical writers to create professional help $999 $399 systems and documentation for desktop and Web-based applications; utilizes support for HTML, PDF import/export, team authoring capabilities, as well as JavaHelp. RoboHelp Server RoboHelp Server software extends the managing and tracking capabilities of Adobe RoboHelp 9 $1,999 $999 software. Automatically build multiple sections of a project, and then publish as a unified online information system. Manage user rights and security, and take advantage of simplified deployment and content configuration. Track and analyze data navigation patterns and repeated search requests to optimize help content and enable powerful searches based on a wide range of variables. Shockwave Player A rich media player used for deploying multimedia content for use in Internet solutions including Free Free education, training, games and commerce. Being phased out in favor of Flash Player. 41M units installed (vs. 99M units for Flash Player) Technical Communication Suite Includes Acrobat, Captivate, FrameMaker and RoboHelp technologies; helps customers improve their $1,899 $99 workflows, especially technical communicators who want a single solution to meet their content creation and publishing needs. Type Sets Various collection packages of Adobe’’s best-selling typefaces; makes it easy to create beautiful text for Varies print, Web and video projects. Source: Cowen and Company, Company Reports. Growth Strategy Generally, the products assigned to this segment are generally more mature products and Adobe’’s focus appears to be in maintaining share for these products. Other than possibly its eLearning, we believe Adobe has less of an emphasis in growing sales for this group in general. The company does point out that there are opportunities in the growing eLearning end market and existing publishing customers may present and opportunity for growth in PDF as the publishing industry increasingly moves from printed page to digital distribution. Also, the company has stated that it will continue to invest in its ColdFusion application development platform to maintain and grow its revenue. 72 February 13, 2012
  • 73. Adobe SystemsCompetitionArticulate (Private)28,000 customers in 120 countries use Articulates easy-to-use tools to developprofessional-looking, interactive courses. Articulates desktop authoring tools andWeb applications including Articulate Studio, Articulate Online and Screenr competewith Adobe’’s eLearning offerings.Autodesk (ADSK, CY10 Revenue: $1.9B)Best known for its AutoCAD software package, ADSK is a producer of computer-aided design (CAD) and modeling software for the manufacturing, architecture,engineering & construction, and media & entertainment industries. Headquartered inSan Rafael, CA, ADSK was founded in 1982, taken public in 1985 and currentlyemploys roughly 6,800 people. Autodesk’’s DWG format competes with Adobe PDFand our Adobe PostScript technologies and solutions.Global Graphics (EBR: GLOG, CY10 Revenue: €€9.6M)Global Graphics provides PDF and workflow products and services for the digitalprinting and publishing industry. The company develops platforms and tools forembedding PDF and PostScript languages in many kinds of devices.IBM (IBM, CY10 Software Revenue: $22.5B)IBM’’s WebSphere application management software and tools compete with AdobeColdFusion.HP (HPQ, CY10 Revenue: $126.8B)Hewlett-Packard is a provider of products, technologies, software, solutions andservices to individual consumers, SMBs and large enterprises. Adobe PostScriptfaces competition from Hewlett-Packard’’s proprietary PCL page descriptionlanguage.Microsoft (MSFT, CY10 Server and Tools Software Revenue: $14.1B)Microsoft’’s Word and Publisher provide low-end competition for Adobe’’sFrameMaker, PageMaker and RoboHelp products, while, in addition to competingwith Adobe PDF, its XPS document format also competes with Adobe PostScript.Adobe’’s Captivate product also faces competition from general contentdevelopment tools such as PowerPoint, while its Contribute product facescompetition from Microsoft’’s FrontPage HTML development tool. Lastly, Microsoft’’sdevelopment tools compete with Adobe ColdFusion.Oracle (ORCL, CY10 Technology Software Revenue: $15.4B)Adobe’’s ColdFusion tools compete with several of Oracle’’s development platformsand tools, including those acquired in its purchases of BEA and Sun.February 13, 2012 73
  • 74. Adobe Systems Techsmith (Private) Founded in 1987, TechSmith provides screen capture and screen recording software for office professionals. Its products include Camtasia Studio, which is used to produce videos for the Internet and mobile devices, and is often used in lieu of fuller-functionality eLearning authoring tools such as Adobe’’s Captivate product and eLearning Suite. Trivantis (Private) Founded in 1999, Trivantis’’ eLearning software is utilized by leading corporations and organizations, including over 70% of the Fortune 100, most of the Fortune 500 and all five U.S. military branches. Its flagship Lectora product competes with Adobe’’s eLearning offerings and is used to create online training courses, assessments, and presentations. It is also used for the conversion of Microsoft PowerPoint presentations into eLearning content. Open Source Competition ColdFusion competes with several technologies available today at no cost including the PHP and PERL programming environments that are available for the Apache Web server.74 February 13, 2012
  • 75. Adobe SystemsHistorical Segment Revenue ($MM, except per share data) FY09A FY10A 1Q11A 2Q11A 3Q11A 4Q11A FY11A Feb 11 May 11 Aug 11 Nov 11Revenue by Segment Digital Media Creatives 1,826.2 2,174.7 577.4 570.8 571.2 627.9 2,347.3 % of Digital Media revenue 76.6% 76.7% 75.9% 75.7% 76.6% 75.9% 76.0% Document Services 557.6 659.9 183.7 183.3 174.7 199.4 741.1 % of Digital Media revenue 23.4% 23.3% 24.1% 24.3% 23.4% 24.1% 24.0% Digital Media Revenue 2,383.8 2,834.6 761.1 754.1 745.9 827.3 3,088.4 % of revenue 80.9% 74.6% 74.1% 73.7% 73.6% 71.8% 73.2% Digital Marketing "Core" Digital Marketing 402.0 130.8 140.7 137.9 167.1 576.5 % of Digital Marketing revenue 54.4% 61.4% 65.4% 65.1% 61.9% 63.4% LiveCycle and Web Conferencing 337.3 82.1 74.4 73.8 102.7 333.0 % of Digital Marketing revenue 45.6% 38.6% 34.6% 34.9% 38.1% 36.6% Digital Marketing Revenue 354.4 739.3 212.9 215.1 211.7 269.8 909.5 % of revenue 12.0% 19.5% 20.7% 21.0% 20.9% 23.4% 21.6% Print and Publishing Revenue 207.7 226.1 53.7 54.0 55.6 55.1 218.4 % of revenue 7.0% 6.0% 5.2% 5.3% 5.5% 4.8% 5.2% Total Revenue 2,945.9 3,800.0 1,027.7 1,023.2 1,013.2 1,152.2 4,216.3Supplemental Omniture Data Omniture User Transactions (T) 5.07 1.38 1.42 1.37 1.49 5.66 Omniture Enterprise Customer Retention Rate 94% 95% 95% 95% 95% 95% Omniture SiteCatalyst as % of Omniture Revenue 56% 52% 51% 50% 49% 50%Revenue by Geography Americas 1,382.7 1,859.0 506.3 492.5 507.6 554.9 2,061.3 % of revenue 46.9% 48.9% 49.3% 48.1% 50.1% 48.2% 48.9% EMEA 928.9 1,168.2 315.1 311.7 293.1 381.0 1,300.9 % of revenue 31.5% 30.7% 30.7% 30.5% 28.9% 33.1% 30.9% Asia 634.3 772.8 206.3 219.0 212.5 216.3 854.1 % of revenue 21.5% 20.3% 20.1% 21.4% 21.0% 18.8% 20.3%Y/Y AnalysisRevenue by Segment Creatives 19.1% 24.4% 1.3% (0.7%) 9.9% 7.9% Document Services 18.3% 10.2% 16.2% 6.4% 16.4% 12.3% Digital Media Revenue 18.9% 20.6% 4.5% 0.9% 11.4% 9.0% "Core" Digital Marketing 36.3% 53.3% 38.2% 46.1% 43.4% LiveCycle and Web Conferencing 6.5% 1.5% (19.0%) 7.2% (1.3%) Digital Marketing Revenue 108.6% 23.0% 30.3% 10.9% 28.4% 23.0% Print and Publishing Revenue 8.9% (1.8%) (4.7%) (7.0%) 0.2% (3.4%) Total Revenue 29.0% 19.7% 8.5% 2.3% 14.3% 11.0%Supplemental Omniture Data Omniture User Transactions (T) 12.2% 12.7% 8.7% 12.9% 11.6%Revenue by Geography Americas (15.3%) 34.4% 24.0% 8.2% 1.0% 12.6% 10.9% EMEA (24.4%) 25.8% 14.4% 12.4% 0.8% 17.4% 11.4% Asia (11.6%) 21.8% 18.0% 4.1% 7.9% 13.5% 10.5%Q/Q AnalysisRevenue by Segment Creatives 1.0% (1.1%) 0.1% 9.9% Document Services 7.2% (0.2%) (4.7%) 14.1% Digital Media Revenue 2.5% (0.9%) (1.1%) 10.9% "Core" Digital Marketing 14.3% 7.6% (2.0%) 21.2% LiveCycle and Web Conferencing (14.3%) (9.4%) (0.8%) 39.2% Digital Marketing Revenue 1.3% 1.0% (1.6%) 27.4% Print and Publishing Revenue (2.3%) 0.5% 3.0% (1.0%) Total Revenue 2.0% (0.4%) (1.0%) 13.7%Supplemental Omniture Data Omniture User Transactions (T) 4.5% 2.9% (3.5%) 8.8%Revenue by Geography Americas 2.7% (2.7%) 3.1% 9.3% EMEA (2.9%) (1.1%) (6.0%) 30.0% Asia 8.3% 6.1% (3.0%) 1.8% Source: Cowen and Company, Company Report.February 13, 2012 75
  • 76. Adobe Systems Cowen Live Model: Digital Media Bottom-up Build ($MM, except per share data) General FY12 FY13 FY14 Creatives Model Release Expected CS6 CS7 (E) Total New Units Sold 11,000,000 9,000,000 9,000,000 Mix Subscription as % of Total New Units Sold 56.0% 56.5% 60.0% Point Products as % of Total New Units Sold 80.0% 80.0% 80.0% Education as % of Total New Units Sold 60.0% 60.0% 60.0% Monthly Creative Suite ARPU Shrink-wrap ARPU $30.00 $30.00 $30.00 Subscription ARPU $40.00 $40.00 $40.00 Other ARPUs Relative to Creative Suite ARPU Point product ARPU vs. Creative Suite ARPU 38.0% 38.0% 38.0% Education ARPU vs. Commercial 30.0% 30.0% 30.0% Creatives Revenue Totals Total Shrink-wrap 2,037 1,648 1,515 Total Subscription 438 1,088 1,529 Creatives Total 2,475 2,736 3,044 Customer Lifetime (Months) 48 Release Month/Months in Market April 8 12 12 Document Services Growth 9.0% 9.0% 9.0% Digital Media Revenue FY11A FY12 FY13 FY14 Creatives $2,347 $2,475 $2,736 $3,044 Document Services $741 $808 $881 $960 Digital Media $3,088 $3,283 $3,617 $4,004 Y/Y Analysis Creatives 5.5% 10.5% 11.3% Document Services 9.0% 9.0% 9.0% Digital Media 6.3% 10.2% 10.7% Source: Cowen and Company, Company Report. This model is only roughly consistent with the remainder of our note, as the note focuses on a top-down build of the model based on management’’s guidance. This model is only meant as an aid for modeling the Digital Media segment. This model is available upon request.76 February 13, 2012
  • 77. Adobe SystemsPro Forma P&L ($MM, except per share data) FY09A FY10A 1Q11A 2Q11A 3Q11A 4Q11A FY11A 1Q12E 2Q12E 3Q12E 4Q12E FY12E FY13E Feb 11 May 11 Aug 11 Nov 11 Feb 12 May 12 Aug 12 Nov 12 Revenue Products 2,684.8 3,159.2 842.7 830.3 814.5 937.0 3,424.5 832.6 870.1 849.8 940.7 3,493.2 3,724.1 % of revenue 91.1% 83.1% 82.0% 81.1% 80.4% 81.3% 81.2% 79.1% 79.1% 78.3% 80.2% 79.2% 77.8% Subscription 74.6 386.8 106.2 109.2 111.9 123.4 450.6 129.2 133.4 137.2 138.4 538.1 635.5 % of revenue 2.5% 10.2% 10.3% 10.7% 11.0% 10.7% 10.7% 12.3% 12.1% 12.6% 11.8% 12.2% 13.3% Services and support 186.5 254.0 78.8 83.7 86.7 91.8 341.1 90.9 96.1 98.7 93.7 379.4 425.6 % of revenue 6.3% 6.7% 7.7% 8.2% 8.6% 8.0% 8.1% 8.6% 8.7% 9.1% 8.0% 8.6% 8.9% Total Revenue $2,945.9 $3,800.0 $1,027.7 $1,023.2 $1,013.2 $1,152.2 $4,216.3 $1,052.7 $1,099.6 $1,085.7 $1,172.8 $4,410.7 $4,785.2 Cost of Revenue Cost of products 180.6 127.5 30.7 34.7 26.2 34.0 125.6 30.3 33.5 29.9 33.4 127.1 131.5 % of product revenue 6.7% 4.0% 3.6% 4.2% 3.2% 3.6% 3.7% 3.6% 3.9% 3.5% 3.6% 3.6% 3.5% Cost of subscription 48.3 195.6 47.9 47.3 47.5 51.3 194.0 54.3 54.7 55.1 57.8 221.9 241.0 % of subscription revenue 64.7% 50.6% 45.1% 43.4% 42.4% 41.6% 43.1% 42.0% 41.0% 40.2% 41.8% 41.2% 37.9% Cost of services and support 67.8 80.5 29.0 27.2 31.0 31.0 118.2 31.8 31.2 32.5 30.2 125.7 132.3 % of services and support revenue 36.4% 31.7% 36.8% 32.5% 35.7% 33.8% 34.6% 35.0% 32.5% 32.9% 32.2% 33.1% 31.1% Pro forma adjustments Less: stock compensation (2.5) (5.0) (3.7) (4.2) (3.9) (4.0) (15.8) (4.1) (4.6) (4.3) (4.6) (17.6) (19.2) Less: amortization of purchased intangibles (61.1) (69.9) (15.9) (15.0) (13.7) (16.6) (61.2) (20.4) (19.2) (18.0) (17.3) (74.8) (66.9) Total cost of revenue 233.1 328.6 88.1 90.0 87.0 95.8 360.9 91.9 95.6 95.2 99.5 382.3 418.7 Gross profit 2,712.7 3,471.4 939.6 933.2 926.2 1,056.4 3,855.4 960.8 1,003.9 990.4 1,073.3 4,028.4 4,366.5 Gross margin 92.1% 91.4% 91.4% 91.2% 91.4% 91.7% 91.4% 91.3% 91.3% 91.2% 91.5% 91.3% 91.2% Operating expenses Research and development 490.6 591.2 150.7 156.7 157.6 165.4 630.5 168.3 168.6 169.0 168.5 674.4 721.0 % of revenue 16.7% 15.6% 14.7% 15.3% 15.6% 14.4% 15.0% 16.0% 15.3% 15.6% 14.4% 15.3% 15.1% Sales and marketing 922.6 1,148.5 303.9 319.7 316.5 345.4 1,285.5 313.8 345.3 331.1 354.4 1,344.6 1,459.2 % of revenue 31.3% 30.2% 29.6% 31.2% 31.2% 30.0% 30.5% 29.8% 31.4% 30.5% 30.2% 30.5% 30.5% General and administrative 264.5 339.0 85.0 80.4 85.9 101.0 352.3 86.4 83.6 86.8 104.1 360.9 378.9 % of revenue 9.0% 8.9% 8.3% 7.9% 8.5% 8.8% 8.4% 8.2% 7.6% 8.0% 8.9% 8.2% 7.9% Total operating expenses 1,677.8 2,078.8 539.5 556.8 560.0 611.9 2,268.2 568.5 597.5 586.9 627.0 2,379.9 2,559.1 Operating income 1,034.9 1,392.7 400.1 376.4 366.1 444.5 1,587.1 392.3 406.4 403.5 446.3 1,648.5 1,807.4 Operating margin 35.1% 36.6% 38.9% 36.8% 36.1% 38.6% 37.6% 37.3% 37.0% 37.2% 38.1% 37.4% 37.8% EBITDA * 1,167.7 1,537.3 441.9 417.7 405.1 494.5 1,759.2 439.3 453.8 450.5 495.5 1,839.0 2,011.3 EBITDA margin 39.6% 40.5% 43.0% 40.8% 40.0% 42.9% 41.7% 41.7% 41.3% 41.5% 42.2% 41.7% 42.0% Interest income (expense) Interest and other income (expense), net 31.4 13.1 (0.8) (0.8) 0.0 (1.4) (3.0) (3.2) (3.0) (3.0) (3.0) (12.2) 0.0 Interest expense (3.4) (57.0) (17.0) (16.7) (16.4) (16.8) (67.0) (16.7) (16.5) (16.3) (16.2) (65.7) (62.8) Total non-operating income (expense), net 28.0 (43.8) (17.8) (17.6) (16.4) (18.1) (69.9) (19.9) (19.5) (19.3) (19.2) (77.9) (62.8) Income before income taxes 1,062.9 1,348.9 382.2 358.8 349.7 426.4 1,517.2 372.4 386.9 384.2 427.1 1,570.6 1,744.6 Provision for income taxes 248.2 333.3 84.1 78.9 76.9 93.8 333.8 84.9 88.2 87.6 97.4 358.1 397.8 Tax rate 23.4% 24.7% 22.0% 22.0% 22.0% 22.0% 22.0% 22.8% 22.8% 22.8% 22.8% 22.8% 22.8% Net income $814.7 $1,015.5 $298.1 $279.9 $272.8 $332.6 $1,183.4 $287.5 $298.7 $296.6 $329.7 $1,212.5 $1,346.8 Net margin 27.7% 26.7% 29.0% 27.4% 26.9% 28.9% 28.1% 27.3% 27.2% 27.3% 28.1% 27.5% 28.1% Shares outstanding 529.9 525.3 511.3 506.3 498.7 496.3 503.2 501.3 501.6 502.0 502.5 501.8 503.7 EPS ** $1.54 $1.93 $0.58 $0.55 $0.55 $0.67 $2.35 $0.57 $0.60 $0.59 $0.66 $2.42 $2.67 Y/Y Analysis Products (21.0%) 17.7% 19.7% 4.4% (1.8%) 12.8% 8.4% (1.2%) 4.8% 4.3% 0.4% 2.0% 6.6% Subscription NA NM 11.2% 18.3% 13.5% 22.9% 16.5% 21.7% 22.2% 22.6% 12.2% 19.4% 18.1% Services and support 1.7% 36.2% 33.1% 50.9% 38.6% 19.7% 34.3% 15.3% 14.8% 13.8% 2.0% 11.2% 12.2% Total Revenue (17.7%) 29.0% 19.7% 8.5% 2.3% 14.3% 11.0% 2.4% 7.5% 7.2% 1.8% 4.6% 8.5% Cost of products (32.2%) (29.4%) 30.7% (12.6%) (10.1%) (3.1%) (1.4%) (1.4%) (3.4%) 14.1% (1.9%) 1.2% 3.5% Cost of subscription NA NM 4.7% (5.7%) (5.9%) 4.4% (0.8%) 13.4% 15.6% 16.0% 12.6% 14.4% 8.6% Cost of services and support (29.5%) 18.6% 44.3% 51.2% 59.1% 35.5% 46.9% 9.5% 14.7% 5.0% (2.6%) 6.3% 5.3% Total cost of revenue 3.8% 40.9% 24.7% 1.9% 7.9% 7.7% 9.8% 4.3% 6.2% 9.4% 3.9% 5.9% 9.5% Gross profit (19.2%) 28.0% 19.2% 9.2% 1.8% 14.9% 11.1% 2.3% 7.6% 6.9% 1.6% 4.5% 8.4% Research and development (16.4%) 20.5% 2.7% 8.3% 5.0% 10.5% 6.6% 11.7% 7.6% 7.2% 1.9% 7.0% 6.9% Sales and marketing (10.5%) 24.5% 11.5% 7.6% 12.2% 16.4% 11.9% 3.3% 8.0% 4.6% 2.6% 4.6% 8.5% General and administrative (12.5%) 28.2% 7.0% 2.4% (7.2%) 14.1% 3.9% 1.7% 4.0% 1.1% 3.0% 2.5% 5.0% Total operating expenses (12.6%) 23.9% 8.2% 7.0% 6.7% 14.4% 9.1% 5.4% 7.3% 4.8% 2.5% 4.9% 7.5% Operating income (27.9%) 34.6% 38.3% 12.5% (4.9%) 15.8% 14.0% (1.9%) 8.0% 10.2% 0.4% 3.9% 9.6% EBITDA * (23.3%) 31.6% 38.8% 15.2% (5.1%) 15.1% 14.4% (0.6%) 8.6% 11.2% 0.2% 4.5% 9.4% Income before income taxes (27.7%) 26.9% 35.4% 15.0% (7.0%) 12.7% 12.5% (2.6%) 7.8% 9.9% 0.2% 3.5% 11.1% Net income (28.3%) 24.7% 40.8% 19.5% (3.9%) 16.4% 16.5% (3.6%) 6.7% 8.7% (0.9%) 2.5% 11.1% EPS ** (25.9%) 25.8% 46.7% 25.9% 0.8% 20.1% 21.6% (1.6%) 7.7% 8.0% (2.1%) 2.7% 10.7% Q/Q Analysis Products 1.4% (1.5%) (1.9%) 15.0% (11.1%) 4.5% (2.3%) 10.7% Subscription 5.8% 2.8% 2.5% 10.2% 4.7% 3.3% 2.8% 0.9% Services and support 2.8% 6.2% 3.6% 5.9% (1.0%) 5.7% 2.7% (5.1%) Total Revenue 2.0% (0.4%) (1.0%) 13.7% (8.6%) 4.5% (1.3%) 8.0% Cost of products (12.6%) 12.9% (24.4%) 29.9% (11.0%) 10.6% (10.7%) 11.7% Cost of subscription (2.7%) (1.1%) 0.3% 8.1% 5.8% 0.7% 0.7% 4.9% Cost of services and support 26.9% (6.3%) 13.8% 0.1% 2.6% (1.9%) 4.2% (7.1%) Total cost of revenue (0.9%) 2.2% (3.3%) 10.0% (4.1%) 4.1% (0.4%) 4.5% Gross profit 2.2% (0.7%) (0.7%) 14.1% (9.1%) 4.5% (1.3%) 8.4% Research and development 0.7% 4.0% 0.6% 4.9% 1.8% 0.2% 0.2% (0.3%) Sales and marketing 2.4% 5.2% (1.0%) 9.1% (9.2%) 10.0% (4.1%) 7.0% General and administrative (4.1%) (5.4%) 6.8% 17.7% (14.5%) (3.2%) 3.8% 19.9% Total operating expenses 0.8% 3.2% 0.6% 9.3% (7.1%) 5.1% (1.8%) 6.8% Operating income 4.2% (5.9%) (2.7%) 21.4% (11.8%) 3.6% (0.7%) 10.6% EBITDA * 2.9% (5.5%) (3.0%) 22.1% (11.2%) 3.3% (0.7%) 10.0% Income before income taxes 1.0% (6.1%) (2.5%) 21.9% (12.7%) 3.9% (0.7%) 11.1% Net income 4.4% (6.1%) (2.5%) 21.9% (13.6%) 3.9% (0.7%) 11.1% EPS ** 4.5% (5.2%) (1.1%) 22.5% (14.4%) 3.9% (0.8%) 11.0% * - Excludes non-recurring and stock compensation expenses. ** - Excludes non-recurring and stock compensation expenses, and non-operating investment gains and losses. Source: Cowen and Company, Company Report. February 13, 2012 77
  • 78. Adobe SystemsBalance Sheet ($MM) 4Q09A 4Q10A 1Q11A 2Q11A 3Q11A 4Q11A Nov 09 Nov 10 Feb 11 May 11 Aug 11 Nov 11 Assets Current assets Cash and cash equivalents 999.5 749.9 900.2 827.5 769.2 989.5 Short-term investments 905.0 1,718.1 1,736.7 1,798.0 1,950.1 1,922.2 Trade receivables 410.9 554.3 533.4 568.6 559.3 634.4 Deferred income taxes 77.4 83.2 66.9 68.0 71.1 92.0 Prepaid expenses and other current assets 80.9 110.5 113.7 127.2 119.5 133.4 Total current assets 2,473.6 3,216.1 3,350.8 3,389.3 3,469.2 3,771.5 Property and equipment, net 388.1 448.9 453.5 463.4 499.1 527.8 Goodwill 3,494.6 3,641.8 3,686.1 3,693.5 3,740.2 3,849.2 Purchased and other intangibles, net 527.4 528.8 447.6 424.2 419.8 545.5 Investment in lease receivable 207.2 207.2 207.2 207.2 207.2 207.2 Other assets 191.3 98.4 164.8 162.0 157.2 89.9 Total assets $7,282.2 $8,141.1 $8,310.0 $8,339.7 $8,492.8 $8,991.2 Liabilities and Stockholders Equity Current liabilities Trade payables 58.9 52.4 54.7 60.5 65.2 86.7 Accrued expenses 419.6 564.3 458.5 496.5 450.3 554.9 Current capital lease obligation 8.8 8.9 9.0 9.1 9.2 Accrued restructuring 37.8 8.1 6.8 5.3 6.7 80.9 Income taxes payable 46.6 53.7 57.1 41.0 61.2 42.6 Deferred revenue 281.6 380.7 399.6 438.1 439.7 476.4 Total current liabilities 844.6 1,068.1 985.5 1,050.4 1,032.3 1,250.8 Long-term liabilities Debt and non-current capital lease obligation 1,000.0 1,513.7 1,511.6 1,509.4 1,507.3 1,505.1 Deferred revenue 36.7 48.9 43.8 43.9 44.4 55.3 Accrued restructuring 6.9 8.3 7.3 7.2 8.0 7.4 Income taxes payable 223.5 164.7 170.7 173.0 143.0 157.0 Deferred income taxes 252.5 103.1 120.8 122.0 151.1 181.6 Other liabilities 27.5 42.0 44.9 44.3 42.8 50.9 Total liabilities 2,391.7 2,948.8 2,884.6 2,950.3 2,928.8 3,208.1 Total stockholders’’ equity 4,890.6 5,192.4 5,425.4 5,389.4 5,564.0 5,783.1 Total liabilities and stockholders’’ equity $7,282.2 $8,141.1 $8,310.0 $8,339.7 $8,492.8 $8,991.2 Growth in deferreds 15.6% 35.0% 23.3% 19.2% 15.0% 23.7% Source: Cowen and Company, Company Report. 78 February 13, 2012
  • 79. Adobe SystemsCash Flow ($MM) FY09A FY10A 1Q11A 2Q11A 3Q11A 4Q11A FY11A FY12E FY13E Feb 11 May 11 Aug 11 Nov 11 Cash flows from operating activities Net income $386.5 $774.7 $234.6 $229.4 $195.1 $173.7 $832.8 $901.0 $1,025.1 Adjustments to reconcile net income to OCF Depreciation, amortization and accretion 282.4 292.7 66.3 66.6 64.0 73.3 270.2 291.4 292.0 Stock-based compensation expense, net of tax 200.0 225.8 71.0 73.4 68.8 72.5 285.7 314.7 342.2 Investment gains (losses) 11.6 11.5 (1.3) 0.8 2.0 (5.8) (4.3) 0.0 0.0 Changes in deferred revenue (45.1) 109.3 13.7 38.6 1.4 47.4 101.1 50.0 57.4 Changes in operating assets and liabilities 282.4 (301.1) (52.2) (19.5) (6.2) 135.6 57.8 18.8 22.0 Net cash provided by operating activities 1,117.8 1,113.0 332.1 389.3 325.1 496.8 1,543.3 1,575.9 1,738.7 Cash flows from investing activities Purchases of short-term investments, net of sales and maturities 213.8 (822.8) (23.4) (61.2) (161.2) 18.8 (226.9) 0.0 0.0 Purchases of property and equipment (119.6) (137.5) (32.4) (37.5) (65.5) (74.9) (210.3) (221.2) (228.0) Purchases of long-term investments and other assets, net of sales (8.7) (5.7) (2.8) (3.8) (2.9) (51.7) (61.2) 0.0 0.0 Acquisitions, net of cash acquired (1,582.7) (193.3) (36.6) (70.5) (151.9) (259.0) 0.0 0.0 Net cash used for investing activities (1,497.1) (1,159.3) (95.1) (102.5) (300.1) (259.7) (757.4) (221.2) (228.0) Cash flows from financing activities Purchases of treasury stock (350.0) (850.0) (125.0) (420.0) (150.0) (695.0) 0.0 0.0 Issuance of treasury stock 179.6 139.3 40.7 46.7 56.2 1.2 144.8 0.0 0.0 Proceeds from debt, net 650.0 1,493.4 0.0 0.0 0.0 Repayment of debt (13.9) (1,003.7) (2.2) (1.5) (4.2) (2.2) (10.0) (8.0) (8.0) Debt issuance costs 0.0 (10.7) 0.0 0.0 0.0 Excess tax benefits from stock-based compensation 12.0 16.4 8.8 0.3 0.9 9.9 0.0 0.0 Net cash (used for) provided by financing activities 477.7 (215.3) (86.5) (366.0) (97.7) (0.2) (550.4) (8.0) (8.0) Effect of exchange rate changes on cash and cash equivalents 14.7 12.0 (0.2) 6.4 14.4 (16.6) 4.1 0.0 0.0 Net (decrease) increase in cash and cash equivalents 113.0 (249.6) 150.3 (72.7) (58.3) 220.3 239.6 1,346.7 1,502.7 Cash and cash equivalents at beginning of period 886.5 999.5 749.9 900.2 827.5 769.2 749.9 989.5 2,336.2 Cash and cash equivalents at end of period $999.5 $749.9 $900.2 $827.5 $769.2 $989.5 $989.5 $2,336.2 $3,838.9 FCFE $998.2 $975.5 $299.7 $351.8 $259.7 $421.9 $1,333.0 $1,354.7 $1,510.7 Growth (14.6%) (2.3%) 36.7% 1.6% 11.5% CY FCFE $959.7 $997.3 $1,261.3 $1,364.0 $1,473.3 Growth (17.3%) 3.9% 26.5% 8.1% 8.0% FCFF $1,000.8 $1,018.4 $313.0 $364.9 $272.5 $434.9 $1,385.2 $1,405.4 $1,559.2 Growth (14.9%) 1.8% 36.0% 1.5% 10.9% CY FCFF $964.0 $1,042.7 $1,313.4 $1,414.5 $1,517.6 Growth (17.5%) 8.2% 26.0% 7.7% 7.3% COWEN SUMMARY: (a) Cash Flow from Operations $1,106.1 $1,101.5 $333.4 $388.6 $323.1 $502.6 $1,547.7 $1,575.9 $1,738.7 Capital Spending (119.6) (137.5) (32.4) (37.5) (65.5) (74.9) (210.3) (221.2) (228.0) Owners Cash Flow $986.6 $964.0 $301.0 $351.1 $257.6 $427.7 $1,337.4 $1,354.7 $1,510.7 Financing $477.7 ($215.3) ($86.5) ($366.0) ($97.7) ($0.2) ($550.4) ($8.0) ($8.0) Non-Recurring Items 358.1 (352.7) (118.9) (403.5) (163.2) (75.1) (760.7) (229.2) (236.0) Beginning Cash & Equivalent $886.5 $999.5 $749.9 $900.2 $827.5 $769.2 $749.9 $989.5 $2,336.2 Change in Cash & Equivalent 113.0 (249.6) 150.3 (72.7) (58.3) 220.3 239.6 1,346.7 1,502.7 Ending Cash & Equivalent 999.5 749.9 900.2 827.5 769.2 989.5 989.5 2,336.2 3,838.9 Ending restricted cash & invstmts 905.0 1,718.1 1,736.7 1,798.0 1,950.1 1,922.2 1,922.2 1,922.2 1,922.2 Ending Cash & Equivalent, Total $1,904.5 $2,468.0 $2,636.8 $2,625.5 $2,719.3 $2,911.7 $2,911.7 $4,258.3 $5,761.1 (a) Excludes non-recurring items Source: Cowen and Company, Company Report. February 13, 2012 79
  • 80. Adobe Systems Gartner Disclaimer The Gartner Report(s) described herein, (the ““Gartner Report(s)””) represent data, research opinion or viewpoints published, as part of a syndicated subscription service available only to clients, by Gartner, Inc., a corporation organized under the laws of the State of Delaware, USA, and its subsidiaries (““Gartner””), and are not representations of fact. The Gartner Report(s) do not constitute a specific guide to action and the reader of this [Prospectus/Company Report] assumes sole responsibility for his or her selection of, or reliance on, the Gartner Report(s), or any excerpts thereof, in making any decision, including any investment decision. Each Gartner Report speaks as of its original publication date (and not as of the date of this [Prospectus/Company Report]) and the opinions expressed in the Gartner Report(s) are subject to change without notice. Gartner is not responsible, nor shall it have any liability, to the Company or to any reader of this [Prospectus/Company Report] for errors, omissions or inadequacies in, or for any interpretations of, or for any calculations based upon data contained in, the Gartner Report(s) or any excerpts thereof.80 February 13, 2012
  • 81. Adobe Systems Addendum STOCKS MENTIONED IN IMPORTANT DISCLOSURESTicker Company NameADBE Adobe SystemsARBA AribaAZPN Aspen TechnologyCRM Salesforce.comCTCT Constant ContactINTU IntuitKNXA KenexaMSFT MicrosoftORCL OracleQADA QAD - AQADB QAD - BRHT Red HatSAP SAP AG (ADR)TRAK DealerTrack Holdings ANALYST CERTIFICATIONEach author of this research report hereby certifies that (i) the views expressed in the research report accurately reflecthis or her personal views about any and all of the subject securities or issuers, and (ii) no part of his or her compensationwas, is, or will be related, directly or indirectly, to the specific recommendations or views expressed in this report. IMPORTANT DISCLOSURESCowen and Company, LLC and or its affiliates make a market in the stock of ADBE, ARBA, AZPN, CRM, CTCT, INTU, KNXA,MSFT, ORCL, QADA, QADB, RHT, SAP, TRAK securities.Cowen and Company, LLC and/or its affiliates managed or co-managed a public offering of KNXA within the past twelvemonths.Cowen and Company, LLC and/or its affiliates received in the past 12 months compensation for investment bankingservices from KNXA.KNXA is or was in the past 12 months a client of Cowen and Company, LLC; during the past 12 months, Cowen andCompany, LLC provided IB services.QADA, QADB is or was in the past 12 months a client of Cowen and Company, LLC; during the past 12 months, Cowen andCompany, LLC provided Non IB services.Cowen and Company, LLC has received compensation in the past 12 months for products or services other thaninvestment banking from QADA, QADB, KNXA.KNXA has been client(s) of Cowen and Company, LLC in the past 12 months.Cowen and Company, LLC compensates research analysts for activities and services intended to benefit the firmsinvestor clients. Individual compensation determinations for research analysts, including the author(s) of this report, arebased on a variety of factors, including the overall profitability of the firm and the total revenue derived from all sources,including revenues from investment banking. Cowen and Company, LLC does not compensate research analysts based onspecific investment banking transactions. DISCLAIMERThis research is for our clients only. Our research is disseminated primarily electronically and, in some cases, in printedform. Research distributed electronically is available simultaneously to all Cowen and Company, LLC clients. Allpublished research, including required disclosures, can be obtained on the Firm’’s client website, February 13, 2012 81
  • 82. Adobe SystemsFurther information on any of the above securities may be obtained from our offices. This report is published solely forinformation purposes, and is not to be construed as an offer to sell or the solicitation of an offer to buy any security inany state where such an offer or solicitation would be illegal. Other than disclosures relating to Cowen and Company,LLC, the information herein is based on sources we believe to be reliable but is not guaranteed by us and does not purportto be a complete statement or summary of the available data. Any opinions expressed herein are statements of ourjudgment on this date and are subject to change without notice.Notice to UK Investors: This publication is produced by Cowen and Company, LLC, which is regulated in the UnitedStates by FINRA and is disseminated in the United Kingdom by Cowen International Limited ("CIL"). In the United Kingdom,‘‘Cowen and Company’’ is a Trading Name of CIL. It is communicated only to persons of a kind described in Articles 19 and49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005. It must not be further transmitted toany other person without the consent of CIL.Copyright, User Agreement and other general information related to this report© 2012 Cowen and Company, LLC. Member NYSE, FINRA and SIPC. All rights reserved. This research report is prepared forthe exclusive use of Cowen clients and may not be reproduced, displayed, modified, distributed, transmitted or disclosed,in whole or in part, or in any form or manner, to others outside your organization without the express prior writtenconsent of Cowen. Cowen research reports are distributed simultaneously to all clients eligible to receive such researchprior to any public dissemination by Cowen of the research report or information or opinion contained therein. Anyunauthorized use or disclosure is prohibited. Receipt and/or review of this research constitutes your agreement not toreproduce, display, modify, distribute, transmit, or disclose to others outside your organization the contents, opinions,conclusion, or information contained in this report (including any investment recommendations, estimates or pricetargets). All Cowen trademarks displayed in this report are owned by Cowen and may not be used without its priorwritten consent.Cowen and Company, LLC. New York (646) 562-1000 Boston (617) 946-3700 San Francisco (415) 646-7200Chicago (312) 577-2240 Cleveland (440) 331-3531 Atlanta (866) 544-7009 Dallas (214) 978-0107 London(affiliate) 44-207-071-7500 Geneva (affiliate) 41-22-707-6900 COWEN AND COMPANY RATING DEFINITIONS (a)Rating DefinitionOutperform (1) Stock expected to outperform the S&P 500Neutral (2) Stock expected to perform in line with the S&P 500Underperform (3) Stock expected to underperform the S&P 500(a) Assumptions: Time horizon is 12 months; S&P 500 is flat over forecast period. COWEN AND COMPANY RATING ALLOCATION (a) Pct of companies under Pct for which Investment Banking servicesRating coverage with this rating have been provided within the past 12 monthsBuy (b) 52.3% 8.4%Hold (c) 44.9% 2.0%Sell (d) 2.7% 0.0%(a) As of 12/31/2011. (b) Corresponds to "Outperform" rated stocks as defined in Cowen and Company, LLCs rating definitions (see above). (c)Corresponds to "Neutral" as defined in Cowen and Company, LLCs ratings definitions (see above). (d) Corresponds to "Underperform" as defined inCowen and Company, LLCs ratings definitions (see above). Note: "Buy," "Hold" and "Sell" are not terms that Cowen and Company, LLC uses in itsratings system and should not be construed as investment options. Rather, these ratings terms are used illustratively to comply with NASD and NYSEregulations.To view price charts, please see or call 1-800-221-561682 February 13, 2012