The company released its 2023 performance forecast: estimated annual revenue of 603 to 623 million yuan, and estimated net profit of -0.97 to -117 million yuan for the whole year. According to the median estimate, revenue for the whole year increased by about 5.7% year on year, of which 23Q4 revenue was about 170 million yuan, up about 11% year over year. Revenue was higher than our expectations.
Focusing on subscription share and ARR, they both recorded high increases in 2023, and the 23Q4 performance was outstanding. The company expects to achieve ARR of 2.45 to 250 million yuan in 2023 (+76-80% year over year), accounting for about 35% of annual subscription revenue (+14pct year over year).
On a quarterly basis, 23Q1/Q2/Q3 ARR increases were 2200/2600/27 million yuan, respectively, and the 23Q4 increase reached about 34 million yuan, which is significantly accelerated; furthermore, 23Q4 accounts for about 40% of subscriptions in a single quarter, proving that the subscription transformation is progressing smoothly.
It is expected that 2024 will have all the elements of subscription volume, accounting for more than half. 1) In terms of products, the company completed the packaging and upgrade of the core product line PDF Editor, released a new product line combining three-terminal integration and cloud service functions such as electronic signatures and AI assistants to promote cloud transformation, while driving subscription transformation through the whole family bucket model; 2) In terms of sales, the “three-step” strategy was clear: the initial transformation focused on new customer development, and strengthened guidance for procurement, maintenance and upgrade services in the medium term. Continuing to guide the subscription transformation of existing permanently authorized customers, and is currently entering the second step; 3) Channel transformation is also helping to develop subscriptions. More incremental customers, channel construction progressed steadily in 2023, and the revenue share increased to about 35% (+6pct year over year). The 23Q4 data proves that this strategy works, and we expect the share of subscriptions to be over half in 2024.
To consolidate the power of AI documents, the PDF editor is fully integrated with AIGC. In April 2023, PDF Editor Cloud, the company's overseas cloud product, took the lead in integrating AIGC technology; released a new product line and increased prices in May; and released a new plug-in, Foxit PDF Assistant, in the ChatGPTPlugin Store in August. After the major version upgrade in September, the company's overseas PDF editor fully integrates AIGC, which can summarize documents, rewrite content, and interact in real time, and will continue to iterate more AIGC functions. The company has gradually implemented AIGC in the office scene, enhanced user stickiness, and successfully established an AI document brand image, which will also help develop new customers.
Investment analysis: Based on the performance forecast and considering the company's investment pace, we adjusted the 2023-2025 net profit to be -1.07/-0.55/ +0.38 billion yuan (the original forecast value was -0.80/-0.53/+0.41 billion yuan). In the period of accelerated subscription transformation, the company's apparent revenue is easily greatly affected by the subscription model's revenue instalment recognition and the fact that subscription pricing is lower than that of a perpetual license. It is recommended that more attention be paid to core metrics such as subscription revenue share and ARR. Since the company established a “subscription first” and “channel first” dual transformation strategy in July 2022, the results have been remarkable. As the subscription transformation is completed in the next two years and apparent revenue growth returns to normal, there is plenty of room for the net profit margin to rise. Maintain a “buy” rating.
Risk warning: no profit in the short term; channel promotion falls short of expectations; Adobe exerts greater competitive pressure; changes in the overseas business environment.