John Murphy had big shoes to fill when he stepped into the role of finance chief for Adobe in 2018. His predecessor, Mark Garrett, helped steer the software maker through a decade-long transition as the company shifted from one-off sales of shrink-wrapped boxes of software to monthly subscriptions.
Murphy, a self-described finance geek, said he admires how Garrett and company CEO Shantanu Narayen handled the sea change. “It’s not a 12- and 18-month product cycle anymore. It’s actually, practically in real time,” Murphy said. “It’s just thousands and thousands of innovations that are delivered for the same price …(customers) pay every month.”
Analysts said Murphy is the latest in a string of strong CFOs at the San Jose-based Adobe. They expect he will help the company extend a streak of stellar performance that has sent stock prices skyrocketing from roughly $28 in 2011 to over $300 this year. “It’s a hall of fame of CFOs in terms of what they have done,” said Dan Ives, a managing director at Wedbush Securities Inc.
But Murphy and other company leaders had a rare misstep recently, which has concerned some investors. The company’s $4.75 billion acquisition of marketing company Marketo backfired when subscription bookings for the business didn’t grow as much as expected. The sluggish growth led to a lackluster sales forecast for the fourth quarter. Adobe is scheduled to release fourth-quarter results tomorrow. The company has forecast revenue of $2.97 billion for the period, below the $3.03 billion expected by some analysts. “I think there is still investor skepticism,” about the Marketo acquisition, Ives said.
By next year, all new software companies and 80% of established players will offer subscription-based business models, according to Gartner, a research and advisory firm. Keeping cash flow and margins healthy through a business model shift, however, is a tricky task, Ives said. During the most difficult point in their transition, Adobe’s sales slipped 8% to $4.02 billion in 2013 with net margins retreating to 7.21% from 19.04%, according to FactSet. “Any move to subscription at a lower price, you are going to see a dip in revenue,” Murphy said. “Then it comes back as the subscriptions stack up.” Murphy was chief accounting officer at computer chip maker Qualcomm before taking the same job at Adobe in 2017.
Since 2013, revenue at the company has steadily grown, however. Tomorrow Adobe is expected to report it has posted more than $10 billion in annual revenue for the first time in its history. “There’s not many companies, never mind software companies, that have broken the $10 billion barrier,” Murphy said. Adobe executives expect annual revenues to fall somewhere around $11 billion for 2019, compared to $9.03 billion in 2018. “We’re on a good trajectory.”
Jay Vleeschhouwer, a managing director for Griffin Securities, agrees that Adobe’s performance has been outstanding. “Other software companies view it as the standard for how subscription model transition can and should go,” he said.
Investors, however, were displeased with Marketo’s performance in the third quarter and its impact on the fourth-quarter outlook. Shares of Adobe slipped 1.75% after the release of the financial results. “It was a little bit of a hiccup,” Murphy said. The subscription bookings for Marketo did grow, he added. “It just didn’t grow as fast as we expected,” Murphy said. “And ultimately, obviously, it translates to revenue a little bit in the short term.”
Murphy was a key figure in Adobe’s biggest bet ever, the acquisition of the business-to-business marketing-automation firm Marketo last year. Gloria Chen, senior vice president for strategy and growth, and Murphy “partnered on both the targeting and the diligence” on the transaction, Murphy said. “We’re essentially the M&A team.” Marketing automation allows companies to plan, manage and track promotional campaigns. The transaction was the largest in Adobe’s history and signaled the company’s aspiration to expand its marketing offerings aggressively.
“The Marketo acquisition filled a specific need for them, in what’s called B2B marketing, business to business,” said Rob Oliver, an analyst with private equity firm Baird. “Adobe traditionally hasn’t been as strong there.”
Adobe is known for products like Photoshop housed in its digital media segment. Adobe Reader is in its document cloud business. The digital experience segment offers marketing, data and analytics tools and has posted strong growth in recent quarters. Digital experience, which was beefed up with the Marketo deal as well as the acquisition of e-commerce company Magento, accounted for 27% of Adobe sales, or $2.4 billion.
Oliver is not concerned about the Marketo transaction. “I don’t want to miss the forest for the trees here,” he said. “Adobe is one of the best acquirers within tech. I always tell investors whenever you do a big deal there can be hiccups. But if anyone is going to figure it out, it’s Adobe.”
Vleeschhouwer agrees. “I like to take a long-term view of the company,” he said. “I don’t ignore a quarterly performance, but having been following the company for such a long time, I think they have shown a very strong capability.” Murphy said he believes Marketo is a great fit for Adobe. “We’re investing to capture market share and build out functionality,” he said.