Analysis of Adobe’s $20 Billion Figma Acquisition

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Adobe (NASDAQ: ADBE) recently reported its quarterly results that continued to outpace market expectations. But the biggest news for the company was its $20 billion acquisition of Figma, a small design startup.

Adobe’s Financials

Adobe’s third quarter revenues grew 13% to $4.433 billion, ahead of the market’s estimates of $4.43 billion. Adjusted EPS of $3.40 also beat analyst estimates by 2.1%.

Subscription revenues grew 13% to $4.13 billion, accounting for 93% of the total revenues. Product revenues grew 6% to $126 million. Services & support revenues grew 13% to $179 million.

By segment, revenues from digital media grew 13% to $3.23 billion with Digital Media’s annualized recurring revenues growing to $13.4 billion. Creative Cloud generated $2.63 billion of revenues, growing 11%, and ended the quarter with an ARR of $11.15 billion. Document Cloud’s revenues grew 23% to $607 million with ARR at $2.25 billion. The digital experience segment revenues grew 14% to $1.12 billion. Within the segment, Experience Cloud subscription revenues grew 14% to $981 million.

Adobe expects to end the fourth quarter with revenues of $4.52 billion and non GAAP EPS of $3.50. The market was looking for revenues of $4.53 billion and an EPS of $3.44.

Adobe’s Figma Acquisition

The biggest news for Adobe was its $20 billion acquisition of Palo Alto-based design startup Figma. Founded in 2012 by Dylan Field and Evan Wallace, Figma has been on a mission to help teams collaborate visually and make design accessible to all. It is known for pioneering product design on the web. Figma’s products make it possible for interactive mobile and web application designers to collaborate through multi-player workflows, sophisticated design systems, and an extensible developer ecosystem.

Figma’s products gained significant popularity during the pandemic as its tools allowed workers to build apps or websites remotely. Figma offers a free version of its software as it has wanted to make sure that designing capabilities are accessible to everyone. Its products are being used by 4 million designers globally. Figma was becoming a major competitor to Adobe’s very own design tools, though Adobe denies those claims. Figma’s product offering competes most directly with Adobe XD, which has been bringing in under $15 million in annual recurring revenue, a tiny portion of Figma’s $400 million ARR. Adobe has been trying to build out XD for the past few years, and had recently even slowed down investment into the product. Adobe believes that the Figma products will complement its suite of offerings instead of removing competition from the design marketspace.

Prior to the acquisition, Figma had raised $332.9 million in funding from investors including Index Ventures, Greylock, Kleiner Perkins, OATV, Andreessen Horowitz, Founders Fund, Fuel Capital, Sequoia Capital, Counterpoint Global, Geodesic Capital, Base10 Partners, WndrCo, IVP, and TeleSoft Partners. Its last round of funding held last year was led by Durable Capital Partners and had valued the company at $10 billion.

The price of the deal has also attracted a lot of discussion in the analyst community. At $20 billion, Figma’s purchase price was double its last valuation. The deal includes a $2.3 billion retention package in the form of restricted stock units awarded to Figma’s employees. Through the acquisition, Adobe plans to create a seamless connection between its tools and Figma, building it out as the native platform to integrate the design tools. Adobe justifies the price tag based on Figma’s total addressable market, which is pegged at $16.5 billion by 2025. Figma is expected to add approximately $200 million in net new ARR this year, surpassing $400 million in total ARR exiting 2022, with a net dollar retention of greater than 150%, gross margins of 90% and positive operating cash flows .

Meanwhile, Adobe’s stock is trading at year low levels of $277.57 with a market capitalization of $129.9 billion. It touched a 52-week high of $699.54 in November last year and a 52-week low of $274.72 this month.

Disclosure:?All investors should make their own assessments based on their own research, informed interpretations and risk appetite. This article expresses my own opinions based on my own research of product-market fit, channel execution, and other factors. My primary interest is in product strategy. While this may have bearing on stock movements, my writings tend to focus on long-term implications. The information presented is illustrative and educational, but should not be regarded as a complete analysis nor recommendation to buy or sell the securities mentioned herein. I am not a registered investment adviser and I am not receiving compensation for this article.

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