How Does Adobe Dominate in Design software Market for A Long Time?

Adobe is an American multinational computer software company. Incorporated in Delaware and headquartered in San Jose, California, it has historically focused upon the creation of multimedia and creativity software products, with a more recent foray towards digital design software. Adobe is best known for its Adobe Flash web software ecosystem, Photoshop image editing software, Adobe Illustrator vector graphics editor, Acrobat Reader, the Portable Document Format (PDF), and Adobe Creative Suite, as well as its successor Adobe Creative Cloud.

The company was started in John Warnock’s garage. In initial stage, Steve Jobs attempted to buy the company for $5 million in 1982. However, Warnock and Geschke refused.

Digital Transformation Drives Adobe’s Continuous Success

Like many other software companies right now, Adobe was flying high ahead of its summer quarter earnings report. The creative software platform’s stock is up 47% in 2020 to-date on optimism that the economic lockdown is creating plenty of new demand, and the financial results did not disappoint. Faced with challenging times that require reliance on the digital world like never before, many organizations continue to turn to Adobe for help.

During the fiscal 2020 third quarter (the three months ended Aug. 28, 2020), Adobe hauled in revenue and net income of $3.23 billion and $955 million, respectively, generating year-over-year increases of 14% and 20%. Earnings per share increased 22%, getting an additional boost as Adobe continued to use its high profit margins to repurchase shares during the period.

It was an impressive quarter considering the circumstances. And even though parts of the business suffered due to effects of the pandemic (more on that in a second), gross profit margin (86.8%) and net profit margin (29.6%) both increased from a year ago as lots of new customers signed up for Adobe’s myriad of services. Paired with the first half of the year, Adobe is having another landmark year in spite of COVID-19.

Within the total, Adobe’s largest segment, Digital Media, grew sales 19% from a year ago, driven by a 19% increase in its creative software suite to $1.96 billion. Adobe’s Document Cloud (which includes its e-signature service) grew 22% to $375 million.

And then there is the Digital Experience segment, which includes things like e-commerce management and customer analytics. Digital Experience weighed down overall results with 2% year-over-year growth to $838 million. However, excluding the cloud advertising business — which suffered from lower ad sales rates and many organizations still migrating from traditional ads over the summer months — the segment posted 14% growth. 

Besides, this software giant is fueling the world’s transition to a more modern (and profitable) type of business operation. The last quarter is a testament to how important the digital world has become, and even as the effects of the pandemic and the ensuing economic lockdown start to ease, Adobe is showing few signs of slowing.

For the final quarter of its 2020 fiscal year, management said it could see an acceleration in results — typical for the company as it often sees increased customer activity in the months leading up to the busy holiday season. As for the specific outlook, though, revenue is expected to increase 12% year over year to $3.35 billion, driven by an 18% increase in Digital Media and a 1% increase in Digital Experience (or 12% excluding advertising). That should equate to an earnings-per-share increase of 147% (or an increase of 15% when adjusted for one-time items that affect comparability).

With $5.26 billion in cash and equivalents, only $4.12 billion in debt on the books, and expansion continuing in spite of a challenging year, Adobe remains a core part of the digital transformation movement and a top way to invest in an ever-growing digital economy.

Unlock the Cloud-Based Subscription Model’s Potentials

For over two decades, Adobe was able to stay competitive as a license-based company. They had built a strong brand identity as a provider of powerful professional and consumer design tools that people were willing to pay a high price for upfront.

But when you have been around for a few decades, you see a lot of changes in an industry – and the software industry was changing yet again. Instead of selling software through licenses and on CDs, many companies were starting to sell software over the cloud on a subscription plan. In 2007, global revenue from SaaS enterprise apps was around $5.1 billion, and was predicted to grow over 100% over the course of the next few years.

To survive, Adobe would have to unlock the subscription model, too. Selling software licenses upfront was less reliable as CD-ROMs became antiquated in the eyes of the software industry. Subscription revenue was more predictable and could be sustained or increased over time to ensure financial security.

Moving to the cloud also presented opportunities for Adobe to protect itself against competing products. With more design tool competitors (like InVision and UXPin) and point solutions (like Sketch) available on cloud-based subscription plans, users could try out Adobe competitors with very little risk. These cloud-based solutions could also roll out updates and improvements whenever they needed to, as opposed to Adobe’s 18-24-month cycle of product releases. All of these factors weakened the lock-in that Adobe previously had with their users.

There were also strategic advantages to moving to the cloud. According to Mark Garrett, Adobe’s CFO, Adobe users had more creative demands, but the creative business was not growing much – their unit sales were pretty flat. Adobe was primarily growing revenue by raising prices, which they knew was not sustainable in the long-term.

But even though a move to a subscription-based cloud service seemed like it made sense for Adobe’s future, this business model was not the most natural fit for Adobe’s products or users. Many users relied on Adobe products to do their jobs, and a subscription model was seen as less stable than outright ownership of the software because users believed that their usage and access could be abruptly interrupted or cut off. Providing the software over the cloud raised issues of whether people would be able to access their work on the road, and whether downloads or buggy updates would set back their work.

On the business side, moving to the cloud was also an instance of Adobe looking to the future and making a long-term decision at the price of short-term reward. Transitioning from licensed software to cloud SaaS is a difficult, expensive, multi-year process. Even though the decision was brilliant in retrospect, it was difficult to commit that much money and work toward a move like this at the time. Many of Adobe’s senior leaders were concerned about the risks of revenue, earnings, and stock prices dropping in the transition period. They were nervous that both customers and shareholders would not understand why they made the switch, would lose faith in the company’s success, and that company financials would tank beyond recovery.

After a lot of planning and modeling, the team realized that the potential rewards hugely outweighed the risks. The final straw was the recession in 2008 and 2009, when Adobe realized that they had very little financial barrier and needed to make this move to protect their company and customers. They fully committed to making the risky move, worked through their concerns, and successfully transitioned into a cloud SaaS company.

Adobe’s Acquisition of Innovative Tools

Adobe needs to keep up the momentum of broadening their customer base and supporting company-wide business. This is how they can continue transitioning out of their last-era mindset.

The company can continue growing by acquiring other excellent design and optimization analytics tools and incorporating them into their existing suite of products:

Acquire more UX/design tools: To keep winning in this space, Adobe needs to acquire other UX tools, such as InVision. Tools like this are more focused on web and mobile app design than Adobe’s traditional suite of products. InVision’s Studio, which they have positioned to be a Photoshop competitor, is specifically designed for the “modern design workflow” with advanced animation and responsive design features. It is extremely user-friendly and has a lot of potential use cases, like presentations, collaborative workflow design, and project management. InVision also has plans to expand even further and release an app store. If Adobe were to acquire InVision, they would not only knock out the threat of competition, but also widen the top of their funnel with a strong product addition.

Provide more point solution tools: Point solutions, like the digital design toolkit Sketch, are for extremely lightweight use cases. Sketch has been described as “a reductionist version of Photoshop, baked down to just what you need to draw stuff on a screen.” A point solution like this works well with the subscription billing service that Adobe has been transitioning to because it allows companies to try out lightweight products. Adobe could acquire point solution tools like Sketch—or they could continue building out point cloud solutions like eSignature. Giving users more ways to try out small slices of the Adobe suite—in a commitment-free way, with a subscription plan—could help attract people who were never before interested in Adobe’s powerful, but expensive and complex, tools.

Acquire next generation analytics companies: The analytics space is adjacent to web design. Adobe has already taken a stab into this field by acquiring Omniture, but they have potential to expand even more with a greater range of tools if they acquire other forward-thinking analytics companies. For example, a company like Amplitude focuses on features that help people understand user behavior, ship iterations quickly, and measure results. This would be a perfect complement to Adobe’s web design tools. It would help designers who are already using Adobe products and attract analysts and product marketers who work alongside the designers.

Adobe’s company journey has gone through many different stages, but through it all, they have focused on delivering quality products to a core audience and then expanding outward to adjacent spaces. Their future success will rely on them continuing to iterate and deliver these products to growing markets in the new SaaS landscape.