Morning Note: Market news and an update from Adobe.

Market News

November’s US inflation report showed headline inflation rising as expected, while core inflation remained unchanged. This prompted traders to increase bets on another rate cut next week, with fed funds futures indicating a 98% likelihood of a 25 basis points cut. Gold moved up to $2,715 an ounce, while the 10-year Treasury yields 4.28%. US equities hit another new high: S&P 500 (+0.8%); Nasdaq (+1.8%, to over 20,000 for the first time).

In Asia this morning, equities also rose: Nikkei 225 (+1.2%); Hang Seng (+1.0%); Shanghai Composite (+0.9%). Chinese retailer stocks rallied on a report of a new round of vouchers to encourage consumption. Donald Trump invited Xi Jinping to his inauguration, CBS reported, an effort to court his Chinese counterpart despite threatening fresh tariffs against the country.

The FTSE 100 is currently trading 0.2% higher at 8,312. Companies trading ex-dividend today include AB Foods (3.14%), DS Smith (1.13%), and Personal Assets Trust (0.28%). Sterling trades at $1.2760 and €1.2135. The RICS house price indicator hit its highest in more than two years in November (25%) as buyers were buoyed by an interest rate cut and an end to uncertainty over Labour’s first budget. Keir Starmer will task local UK councils with meeting mandatory house building targets as he aims to hit his goal of delivering 370,000 new homes per year.

The ECB is set to lower rates for the fourth time this year, by 25 basis points, according to a Bloomberg poll. Bloomberg Economics said the easing cycle will end in 2025 when the deposit rate reaches 2%, with cuts at every meeting at least through March.

Brent Crude continued to rise to $73.75 a barrel as supply fears were heightened by recent US remarks suggesting stricter restrictions on Russian and Iranian activities.

Source: Bloomberg

Company News

Last night, Adobe released results for the financial year to 29 November 2024. The figures were a touch ahead of market expectations, but the guidance issued for FY2025 was slightly more muted than expected. In response, the shares fell by 9% in after-hours trade.

Adobe is a global software company best known for the Acrobat product, considered the gold standard for creating, editing, scanning, signing, and sharing digital documents. The company generates annual revenue of more than $21bn through a recurring revenue model with real-time visibility – subscriptions account for more than 95% of the total. As a result, the business tends to be fairly resilient during economic downturns.

The group believes every disruptive technology has presented opportunities for Adobe to innovate and increase its addressable market opportunity. This has been true for cloud computing, mobile, as well as AI. The company estimates it has an addressable market of more than $200bn, leaving it well positioned for significant growth in the years ahead with its industry-leading products and platforms.

During the latest year, the company introduced multiple generative AI models in the Adobe Firefly family including Imaging, Vector, Design, and most recently Video. Firefly-powered generations across Adobe’s tools surpassed 16bn, with every month in the last quarter setting a new record.

During the latest financial year, revenue grew by 11% in constant currency to a record $21.5bn. Growth was driven by strong demand across Creative Cloud, Document Cloud, and Experience Cloud. In the final quarter, revenue was up 11% to $5.61bn, a touch better than the market forecast of $5.54bn.

Digital Media is the group’s largest division, accounting for 74% of revenue. During the final quarter, revenue grew by 12% to $4.15bn, with Creative and Document Cloud up 11% and 17%, respectively. Net new Digital Media Annualised Recurring Revenue (ARR) grew by $578m to $17.33bn. Digital Experience grew by 10% to $1.4bn, while the smallest division, Publishing & Advertising, fell by 2% to $65m.

The company earns very high operating margins, in the mid-40s. In the latest financial year, the margin rose from 45.9% to 46.6%. EPS grew by 15% to $18.42 and by 13% to $4.81 in the final quarter, better than the $4.66 expected by the market.

The business is very cash generative, with $8.1bn generated in the year, and the group ended the period with net cash of $2.3bn. This was despite making significant investments in its technology platforms. The group repurchased $2.5bn of its shares during the final quarter, leaving $17.65bn remaining on the current $25bn programme to be completed by the end of the year.

Adobe provided guidance new guidance for FY2025 which factors in current expectations for the macroeconomic environment. Revenue is expected be between $23.30bn-$23.55bn, slightly below the current consensus forecast of $23.78bn, while EPS is expected to hit $20.20-$20.50, again a touch below the market forecast of $20.54.

Source: Bloomberg