When you look at Adobe and Salesforce, while there are many differences, they compete directly in some areas. And when you consider their overall performance, the numbers weren’t all that different in their most recent earnings reports:
For Adobe:
- Revenue of $4.53 billion, which was right in line with analysts’ expectations, up 10%, which translates to 14% in constant currency if the dollar weren’t so strong it was dragging down overseas earnings numbers.
For Salesforce:
- Revenue of $7.8 billion, compared with $7.2 billion expected by the analyst class. That was up 14%, or 19% in constant currency.
On its face, that’s pretty darn similar, yet Salesforce’s stock price has gotten slammed since it revealed its results. On Friday, the day after Adobe announced its most recent results, its stock closed up nearly 3%.
To be fair, Salesforce did drop the bombshell news that Bret Taylor was leaving at the same event, which may have spooked investors some, but Adobe’s 10% number isn’t exactly something to scream from the rooftops.
In fact, it’s dangerously close to single-digit growth doldrums, a place no public company wants to be living (except perhaps IBM). But Adobe has a couple of things going for it that Salesforce doesn’t. The first is that it’s diversifying its income in a big way, which should help as we enter the new year amid ongoing economic turbulence.
While the vast majority of the revenue still comes from the creative side of the house, as Adobe celebrates its 40th anniversary, we are starting to see long-term bets that CEO Shantanu Narayen made on marketing starting to pay off. That includes the $4.75 billion Marketo acquisition and the $1.6 billion Magento acquisition, both of which occurred in 2018.
The company also announced that Experience Cloud, which includes marketing tools and analytics products, reached $1 billion for the quarter for the first time — $1.15 billion, to be precise.
Brent Leary, founder and principal analyst at CRM essentials, who watches the marketing and sales markets closely, said it’s a big milestone for Adobe.
“I think most people still think of Photoshop, Illustrator and all the rest of the Creative Cloud apps, but Experience Cloud hitting this milestone illustrates the importance of using those tools to create and manage customer experiences to build deep, long-lasting relationships with them.
“Experience Cloud gets to come out of the shadows of Creative Cloud a bit,” Leary told TechCrunch.
Speaking of diversifying, investors may not have liked Figma’s $20 billion price tag when it was announced, but they seem to be settling into the idea of it becoming part of the company. Of course, the deal still has to clear significant regulatory hurdles in the U.S. and abroad before it becomes a reality.
Yet even without that, let’s face it: Figma revenue is not going to move the needle all that much in the short term, and Adobe is doing pretty well. But let’s take a closer look at these two reports and see if they are as similar as they appear at first glance and try to parse why Adobe is getting more favorable investor treatment.
Inside Adobe’s growth rate
Unlike many enterprise SaaS companies that end their fiscal years a month after the calendar year closes, Adobe’s financial year wrapped up on December 2, 2022. So when we discuss its fiscal 2022, we’re talking about the 12 months ended this December, while its fiscal 2023 will close in early December of next year.
As we noted above, in unadjusted terms, Adobe is getting close to a single-digit growth pace. That’s not where any software company with a growth story wants to find itself. That said, a few things are coming that could help Adobe’s growth rate tick up a few points.
Recall that Adobe told investors that in its fiscal 2023 it expects total revenue of $19.1 billion to $19.3 billion (and remember that Salesforce told analysts the economy is too volatile to even project its FY 2024 revenue at this juncture). Compared to the $17.61 billion it posted in its fiscal 2022, Adobe is looking at 8.5% to 9.6% growth next year. The dreaded single-digit growth pace is therefore to be expected, yeah?
Well, consider:
- Software companies, like other businesses, are likely being a mite conservative with their guidance given general macroeconomic uncertainty.
- Furthermore, the currency issues that cost Adobe four points of growth in Q4 F2022 are lessening, which could help it grow faster next year.
- Also, Figma.
Above, we detailed that the Figma buy won’t provide a massive boost to Adobe’s gross results, which is true. But we’d argue that the deal does have a shot at boosting the company’s growth rate enough to pull it out of the danger zone all by itself. (A similar argument could be made regarding Salesforce’s growth rate and its past acquisitions, especially those valued in the billions, like Slack.)
How so? Adobe’s fiscal 2023 expectations do not include potential Figma incomes, as the company is currently both separate and private. That much was made clear on the Adobe earnings call. Here’s what we do know, from when the deal was announced:
- Figma was expected to add around $200 million in annual recurring revenue (ARR) this year.
- That growth was expected to push the company’s end-of-year ARR over the $400 million mark.
Now, let’s presume that Figma is only able to maintain its ARR growth in dollar terms next year. That would push the company’s growth rate down to around 50% from around 100% this year and push its ARR to around $600 million next year.
GAAP revenues trail ARR numbers as the latter are a forward metric of sorts, so presume, say, $500 million in net revenue adds in 2023 if Figma was part of Adobe from the start of the year on (again, fiscal and calendar quarters don’t perfectly line up, here; we’re riffing). The question, therefore, is this: Would a $500 million gain in fiscal 2023 revenue at Adobe make a material change to its growth rate?
We think the answer is yes. With $500 million in top line added to Adobe’s current, Figma-free projections, it would generate around $19.6 billion to $19.8 billion in total revenue next year. That would boost its growth rate to between 11.3% and 12.4%. Even without a more favorable currency environment, and what we presume is a conservative growth guide from the company, Figma’s added incomes could keep Adobe from the land of single-digit growth. That’s a place where no company wants to find itself unless it intends to focus more on shareholder return (dividends, buybacks) than growth. And because Adobe is looking to buy Figma, we can infer that it is more focused on growth than anything else.
There’s a lot more going on at Adobe, including its widening product suite, growing its subscriber funnel and more. But those considerations are already baked into its guidance; the Figma deal is the X-factor in its potential 2023 results that have us thinking.
Adobe beat profit expectations in its most recent quarter, and analysts anticipate it will generate $19.37 billion in revenue next year. Provided that Figma doesn’t wind up being a profitability headwind when — and if — the deal closes, Adobe could be in good shape to grow more quickly than anticipated next year, while also beating near-term profit expectations. That’s not a bad combo.
Will it be enough to reinflate the company’s market cap to where it was? Let’s not be hasty. But amid the slowing growth at Adobe, there are some positive vibes. Perhaps we’ll see related dynamics at other software companies, teeing up a better calendar 2023 than some expect.
How does that compare with Salesforce? Well, it tracks pretty closely to the extent we have data to judge. Let’s not forget that Salesforce refused to provide a forecast for its next fiscal year, but it did project next quarter, so we can at least look at that and see how that growth projection compares to Adobe.
In the most recent report, Salesforce slowed from 27% to 22% growth. That’s still very good, but it’s expecting growth of 8% to 10% in the next quarter. Again, it’s attributing that to economic uncertainty, currency fluctuations and customers just buying less. But that number looks familiar, doesn’t it?
That’s because it’s pretty darn close to what Adobe is projecting for its entire upcoming fiscal year. Even though Salesforce chose not to offer that projection, if you compare how closely these two companies have tracked, it’s not hard to extrapolate that it would be having a similar year (even if it chooses not to say so).
If Figma goes through, that should give Adobe a bump, and maybe that’s why investors took a bit more favorable view. It’s fair to speculate that maybe Salesforce will take a similar approach and make an acquisition early in 2023 to get a similar revenue boost when growth is hard to come by.
We’ll see in 2023.
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