Adobe stuns us with an 86% gross profit margin – exceeding even Apple, Amazon, Microsoft, and Google. Yet, in a contrast, its operating margin only at a 29% level. In 2019, The creator of Illustrator generates a 9.5 B gross profit margin but only 3.27 B converted as operating margin. The largest cost of software maker is not its software making or research. What does it mean for shareholders? We try to track this financial ratio layer by layer, from revenue to earning, from production to marketing strategy.
What does Adobe need to deliver its 11.7 B revenue? As expected, it has to develop software that costs 1.67 B. This number accounts for 14% of total revenue. Interestingly, the largest cost of creative cloud maker is sales and marketing with a total of 3.24 B or 34% portion of revenue. This number dwarf any other cost component – including 1.93 B research and development. What Adobe get by paying that high cost?
Content That Sells. Where 3.24 B Goes
The graphic design world believes that stunning design, impressive user experience, the eye-catching appearance will bring more customers and sales. If they have to choose the ambassador of this hypothesis, it will be no other than Adobe. Visiting Adobe’s homepage, we found an 8-like infinity symbol mimicking cloud – telling us, “Adobe Creative Cloud gives you the world’s best creative apps and services so you can make anything you can imagine, wherever you’re inspired.”
Infinite imagination – limitless location.
Contributing almost 60% of revenue, Adobe creative cloud is surely our most focused. Any marketing and sales strategy converge here. Adobe strategy is not just pouring cash into advertising. It builds a platform, Adobe has its own community (Behance), has a blog with outstanding content, setting the graphic trend for year to year, making tutorial. Adobe dominates everything about making art. Great content and great product, no doubt that every search and every keyword about art or design will end up at Adobe’s door.
According to visualcapitalist.com, in 2019 there are 340 M visits per month to the Adobe website. We believe that high-quality traffic is one of the key drivers of additional 1.6 M subscribers annually.
We think that this achievement worth 3.4 B total cost. And if all of that isn’t enough, try to go Adobe channel on youtube: “Keep up with Hovering art director, The heist, and secret Agent AD – great cinematic works, emphasizes the message of how powerful is Adobe tools.
Financial Ratio Analysis: Ignite Growth
Question is – apart from all that artistic effect – how much this high cost affects Adobe revenue? From 2015 till 2019, Adobe increased its sales cost from 1.68 B to 3.24 B or added up 156%. How much it gets? Neglecting MarketoMeganto acquisition (which needs time to take effect), in the same period, Adobe earning soar up 637% from 4,8 B in 2015 to 11,17 B in 2019. Now we don’t have a complaint about its marketing cost.
Reader could also read about our analysis on Adobe’s Balance Sheet here