The low-key maker of digital tools for creating PDFs and editing photos delighted investors by reinventing itself as a subscription software company. His recent attempt to keep up with the times isn’t going down too well.
Adobe last week announced its largest acquisition to date, agreeing to buy Figma, a little-known software startup that specializes in helping digital developers collaborate. The $20 billion transaction price spooked investors and raised questions among analysts about the health of Adobe’s business.
Tools to edit and manipulate photos and videos are in high demand as people create visual content like never before. Designers have increasingly been collaborating remotely since the pandemic began, relying on digital tools to do so. That has fueled demand for new applications, spawning Australian-based startups like Figma and Canva.
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Adobe, the biggest competitor in the design software market by revenue, is struggling to embrace that enthusiasm and is beginning to feel the impact. The company on Thursday reported quarterly results that showed a continued slowdown in revenue growth and issued guidance that fell short of Wall Street expectations. Sales of new annual subscriptions related to the Creative Cloud service, which includes features like the well-known Photoshop suite, fell slightly short of the company’s earlier forecast.
Adobe products like Photoshop and Illustrator are almost indispensable tools for people who design marketing materials and magazines. However, some users have complained on social media and elsewhere that the products are difficult to use and lack the collaboration features available with Figma and elsewhere.
“Figma is fast, small and sleek,” said Daniel Vinci, who runs an independent company that designs websites, and said he and his clients have embraced the startup’s tools to collaborate on digital projects. “Anyone can pick it up and start working. No Adobe product works like that,” he said.
Adobe said it has been constantly modernizing its products and introducing collaboration features in recent years.
Figma’s appeal to users like Mr. Vinci explains why Adobe was willing to pay 50 times the smaller company’s expected annual recurring revenue for 2022 and double the valuation it received in a funding round last year.
“The acquisition is at such a level that it raises concerns about what’s going on under the covers with the core business,” said Brian Schwartz, a senior analyst at investment firm Oppenheimer & Co.
Adobe shares fell nearly 17% on Thursday after the announcement and another 3.12% on Friday. The stock is down about 47% this year, underperforming the broader market.
defended the acquisition as “transformative,” adding that analysts say big deals are often viewed with skepticism.
The currently weak economic environment is the right moment for the company to act.
“Stronger companies are actually the companies that should be taking the steps to position themselves to serve customers for decades,” Mr. Narayen said in an interview. “We truly believe the opportunity is for us to usher in this new world of collaborative creativity.”
Mr. Narayen’s ability to buy Figma in bulk at this price stems from the success he had in converting Adobe ten years ago. Mr. Narayen took over the company in 2007 when it sold its software to users, usually on disk. But the software business changed as the growing field of cloud computing brought about the sale of such products online, as a service, and on a subscription basis.
In 2011, Mr. Narayen welcomed the change and established Adobe as the then rare incumbent software vendor to adapt to the emerging sales model that has become ubiquitous today. The company had annual sales of around $4.2 billion at the time. It’s now generating more than that in a quarter. Adobe grew into a software giant with a market value of $320 billion at its peak last year, and its shares rose 10-fold over the past decade before the Figma deal was announced.
During Adobe’s move to the cloud, there were also naysayers who questioned the company’s strategy, Mr. Narayen said. “Everyone points out the few people who have questions when things change, but the believers are the ones you really want to agree with,” he said.
Other software powerhouses have been slower to adapt.
the major provider of database software, has downplayed the importance of cloud computing for years and is now investing heavily in expanding these activities.
International Business Machines corp
Transitioning to the cloud was also slow, then spent around $34 billion acquiring Red Hat Inc. in 2019 to bolster its market presence.
Adobe executives say acquiring Figma will usher in a new era of growth. “This is about positioning the company to define new categories and drive growth for decades to come,” said Chief Financial Officer
Figma, Adobe said, would also help it tap into a new user base. The company says Figma would add developers and others who weren’t typically its customers, in addition to the designer community that already uses its tools.
To prove skeptics wrong, Mr Narayen said the company would also focus on demonstrating strength in its core business.
The deal, which is subject to regulatory review and otherwise expected to close next year, would add collaboration features to Adobe products that the company has struggled to develop. In 2016, Adobe launched a collaborative design tool, but it didn’t catch on in the market, he said
Adobe’s chief product officer, and efforts have largely been shut down. Now, he said, Adobe plans to make more of its design tools available in Figma, such as B. Photo editing features of Photoshop to facilitate collaboration.
However, Figma users are concerned about the combination. Mr. Vinci, the independent web designer who loved the startup’s product, said he’s currently looking at alternatives like Dutch design software company Sketch BV.
write to Aaron Tilley at [email protected]
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