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Announced by Adobe Figma’s $20 billion acquisition overshadowed a strong third quarter and a mixed fourth quarter outlook.

The purchase price will be approximately equal in securities and cash, and the deal is expected to close in 2023, subject to regulatory and shareholder approval.

very generous offer

A generous multiple of about 50 times annual recurring revenue (ARR) paid by Adobe and an unusually timed deal sent the stock price plummeting after the announcement.

We think this acquisition is strategically sound, but both the timing and the very high valuation are concerning.

We have lowered our expectations slightly and incorporated them into the model management guidance parameters for the Figma acquisition. This raised the fair value estimate from $500 to $450 per share.

attractive rating

We find the stock attractive, but uncertainty is growing as the environment continues to deteriorate and the Figma acquisition further weakens the company’s financial position.

Third quarter revenue of $4.433 billion increased 15% year-over-year on a constant currency basis, versus forecast and consensus of $4.43 billion.

Digital Media segment revenue increased 16% year-over-year, while Digital Experience (DX) revenue increased 15% year-over-year.

solid demand

The company added $449 million in new annual recurring revenue, up from a projected $430 million.

Adobe noted increased demand from home, small business, and enterprise customers throughout the quarter as it expanded its portfolio for digital media and DX.

Large deals, transformational deals and digital sales continued with no apparent gradual deterioration from the previous quarter.

We continue to be impressed with Adobe’s ability to grow its user base and achieve retention rates that exceed pre-pandemic levels.

Margin normalization

Non-GAAP operating margin was 44.1%, compared with 46.0% last year and 45.0% last quarter, and is expected to return to more normal as containment measures ease.

Remaining performance obligations (RPO) increased 12% year-over-year to $14.11 billion and current deferred revenue increased 14% year-over-year to $4.829 billion. Given the headwinds, we think these metrics are broadly indicative of healthy fundamentals, albeit a slight slowdown for Adobe.

We have lowered our earnings guidance based on our outlook, which includes lower earnings and improved EPS, but we have generally moderated our profitability estimates.

mixed fourth quarter

Fourth quarter fiscal 2022 earnings guidance of $4.52 billion was below consensus of $4.582 billion, while non-GAAP EPS guidance of $3.50 was $0.05 above market expectations.

Company expects to generate $550 million in new annual net recurring revenue, bringing annual revenue to $1.88 billion, in line with previous forecast of $1.9 billion .

I think it’s admirable in this environment, but the inconsistent wording on the conference call suggests that all is well in the fourth quarter, while the price of actually reducing bookings by $20 million. I think the settings are wrong.

figma success

Over the past two years, we’ve seen Figma gain UI market share quickly.

While this product doesn’t meet exactly the same needs, many of these benefits came at the expense of Adobe’s XD solution.

Given Adobe’s history of acquiring competitors, the announcement of the Figma acquisition isn’t surprising.

surprise timing

That said, while the timing is interesting in that Adobe could theoretically have been acquired at any time since its inception in 2012, it’s unclear if there were any other interested parties.

Additionally, with the environment deteriorating and Multiple continuing to contract for software, we believe there may have been a better opportunity.

Management claims to be excited about the organic growth potential, but the acquisition still appears to be a defensive move.

Related Acquisition Policy

Adobe can be credited for its relevant acquisition strategy over the last 20 years.

In this case, however, Adobe paid 50x its estimated ARR for 2022. This is a staggering amount of money and should clearly prove to investors that Figma is worth a very high price.

Look forward to more information at the company’s Investor Day next month.

Adobe expects the transaction to be 100 to 200 basis points lower in margins in the first year after closing and accretive to EPS in the third year.

Management is very excited to combine Figma’s co-creative design with all of Adobe’s core tools, including Photoshop, and believes this combination will accelerate long-term growth.

© Morningstar, 2022 – The information contained herein is for educational and informational purposes only. It is not intended to, and should not be construed as, a solicitation or encouragement to buy or sell any listed securities. Comments are the opinions of the authors and should not be considered personal recommendations. The information in this document should not be the sole source of information for making investment decisions. Always contact a financial advisor or financial professional before making any investment decision.


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