How Adobe makes money?

I plan to write two articles to discuss Adobe, this is the first of them; the second article, “Adobe, a listed company with no strong competitors in its main business for a long time”, will be posted after it is written.

Adobe’s achievements do not lose to Microsoft

Many more senior friends or average investors have always believed that Adobe (ticker: ADBE) was a software company that relied on Photoshop and other multimedia products twenty years ago to enter the world with one and a half tricks; just like Microsoft in the eyes of ordinary friends (ticker: MSFT) is the same as Windows and Office. If these two are still the same as most people’s impression of 20 years ago, they will never have their current status and market value. — These two companies are also typical competitive advantage example in my “The Rules of Super Growth Stocks Investing”. They have been repeatedly used as the two major software vendors as examples of corporate competitiveness and moats. Coincidentally, they were listed on the U.S. stock market in the same year. I personally think that these two have a relatively long history and have become famous before the internet appeared. They are two of a few very successful “pure software” companies.

Adobe Business Overview

According to the 2020 annual financial report released by Adobe:

  • Annual revenue of USD 12.868 billion
  • Gross profit USD 11.146 billion
  • The equivalent gross profit margin is as high as 86.62%. As far as I can remember, among the super-large U.S. stocks listed companies, there should be only two major credit card network companies, Visa (ticker: V) and MasterCard (ticker: MA) higher than this number .
  • Net profit 5.26 billion

Three types of revenue

Business categoryRevenue (in US$ billion)Annual growth ratePercentage of annual revenue
Subscription11,626+21%90%
Product2.66-22%4%
Service and other0.153-17%6%
Total12.868+15%100%

Subscription category

The subscription item in the above table is very important and can be further subdivided as follows:

Business unitProducts and solutions includedRevenue (in US$ billion)Annual growth rate
Digital media(1). CreativeCloud Suite: Photoshop, Illustrator, InDesign, Premiere, After Effects, Dreamweaver, Animate, InCopy, Fresco, Muse, Lightroom, Dimension
(2). Adobe Sensei
8.813+22%
Digital experience(1). Adobe Marketing Cloud: Target, Experience Manager, Social, Media Optimizer, Campaign, Adobe Stock, Audience Manager, Primetime, Behance, Portfolio
(2). Adobe Analytics Cloud
(3). Magento Commerce Cloud
2.66+17%
Publish and advertisement(1). Adobe Document Cloud: Adobe Acrobat, Adobe Acrobat Reader, Adobe Send & Track, Adobe Scan
(2). Adobe Sign
(3). Print and Publishing: Adobe Scan, Adobe PostScript, Adobe PDF
0.153+5%
Total11.626+21%

The success on its new business

Since digital multimedia is mostly well-known products, this article will not discuss it.

Judging from the second table, the source of the big revenue from digital experience is entirely new businesses that have been added in the past two decades. In addition, the third item of advertising and digital signature is also a brand new business. Why should I emphasize these new businesses?

  • A company, especially a super heavyweight listed company like Adobe, due to the management team is unwilling to take risks, they just want to eat a stable meal and keep their jobs and huge profits. No one will refuse the astronomical stable salary and revenue, and run to risk the high possibility of losing their jobs. Spend money to develop new business, which is thankless and has a very low chance of success (and usually the probability of success of this kind of thing is inversely proportional to the size of the enterprise, which is beyond your imagination!)
  • The revenue ratio and products of the new business have been increasing. Digital experience alone accounted for 23% of the company’s revenue in 2020, and it continues to increase.
  • Digital experience, advertising, and digital signatures are all invisible businesses. The competition is fierce and many manufacturers invest in them. However, there are huge profits, especially the digital experience is a brand-new industry. Now is the time hundreds of companies, both big listed companies and satrtups have been entering this industry. The success of the industry has not yet been defined, and there is no obvious leader. But Adobe has already profited from it, it is not easy.

These two new businesses have injected new impetus into the company’s growth, fully demonstrating the ambition of the new leadership team and the transcripts they handed over. This is also what I mentioned in my previous post article The valuation impact of diversity to listed companies. Adobe is one of the few large companies with U.S. stocks that has successfully conducted business diversification. This is also one of the many reasons why market investors have been optimistic about its prospects.

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