Software solutions provider Adobe Systems on Thursday announced it bought privately held collaboration-software rival Figma for $20 billion in cash and stock in the company’s largest ever deal. This deal is over four times what Adobe paid for Marketo in 2018. Before that, the biggest was Macromedia for $3.4 billion in 2005. Adobe’s aggressive acquisition came as they also announced fiscal third-quarter results Thursday which highlighted continued deceleration in ADBE’s growth. The market priced the deal and earnings with concern with the stock closing at $309.13 down $62.39 or 16.79% today.
Who is Figma
Figma just turned 10 years old and offers cloud-based tools used by software designers in areas like user interface, thus competing with Adobe’s XD service. Figma’s cloud-based collaboration tools have gained a loyal following among software developers and product managers who build apps and other technology products. What attracted Adobe is that they believe Figma will enable them to tap into demand from these users complementary to the base of designers who use its existing software tools.
A report by Macquarie Research earlier this year noted that “many designers pull Figma into their organizations like developer tools.” A report by CNBC last month said “tens of thousands” of software developers at Microsoft now use Figma as well—despite the availability of Adobe’s tools through an existing business relationship. – WSJ
The three venture firms that led Figma’s earliest rounds were Index Ventures, Greylock Partners and Kleiner Perkins and all own percentage stakes in the double-digits, people familiar with the matter said. That means they’ll each return over $1 billion. Investors in the 2021 round doubled their money. They include Durable Capital Partners and Morgan Stanley’s Counterpoint.
The Figma Deal
Adobe will pay $20 billion in roughly half cash, half stock. The price reflects a multiple of about 25 times what Figma’s annualized recurring revenue could hit next year if it keeps growing at its current rate. That compares with about 10 times forward revenue Adobe paid for Marketo. It also comes at a time when technology stocks have been selling sharply, accelerating lower after the latest CPI report.
Just last year, in the height of the bull market the smaller company was valued at $10 billion in a funding round and has been expected to surpass annual recurring revenue of $400 million for 2022. Adobe said Figma has gross profit margins of approximately 90% and positive operating cash flow.
During the earnings conference call Thursday morning, Adobe said around two-thirds of Figma’s users aren’t from the group of designers that make up Adobe’s core customer.
Adobe CEO Shantanu Narayen on CNBC said “Figma is actually one of these rare companies that has achieved incredible escape velocity,” said Narayen, Adobe’s CEO since 2007. “They have a fabulous product that appeals to millions of people, they have escape velocity as it relates to their financial performance and a profitable company, which is very rare, as you know, in software-as-a-service companies.”
What concerns investors is the pricey nature of the deal in a time of uncertainty and comes from at a time of weakness. Adobe’s fiscal third-quarter results showed a continued deceleration in the company’s growth. Revenue has grown by an average of 14% year over year over the past four quarters, compared with an average of nearly 25% over the previous four periods. ADBE said that the deal isn’t expected to add to adjusted earnings until “the end of year three.”
Furthermore, Adobe’s revenue forecast for the current fiscal quarter ending in November came in below Wall Street’s target for the fourth consecutive period on Thursday. Figma is expected $400 million in annual revenue to ADBE, which equates to about 2% of what Wall Street expects Adobe’s revenue to hit next year. In a nutshell ADBE has paid for an expensive cloud acquisition at a time when the market believes it didn’t have to. For the top cloud companies in the BVP Nasdaq Emerging Cloud Index, forward multiples have fallen to just over 9 times revenue from about 25 in February 2021. Snowflake, Atlassian and Cloudflare, the three cloud stocks with the highest revenue multiples, have collapsed 41%, 33% and 51% this year, respectively.
Adobe’s shares are now down 46% for the year compared with a 26% decline for the S&P 500 software group.
About Adobe
Adobe Inc. (NASDAQ: ADBE) was founded in 1982 by John Warnock and Charles Geschke after leaving the legendary Xerox PARC, the company which pioneered the modern personal computer and many related technologies. Since then, Adobe has become an industry leader across creative software (Photoshop), marketing automation (Marketo), and even documents with its PDF file format.
Adobe completed its acquisition of Frame.io in October 2021, which finally solves the problem of collaborating on video edit projects with teams and clients.
From The TradersCommunity Research Desk