Adobe (NASDAQ:ADBE) will report its Q4 FY11 earnings on March 19. We take a quick look at a few key drivers that we think will drive Adobe’s earnings, going forward. Adobe restructured its business in 2011 to focus on two areas – digital media and digital marketing. It also made a series of small, but significant, acquisitions which should help it maintain its lead in Creative software, and aid its efforts to rule the digital marketing and advertising space. In this earnings release, we will look primarily at how Adobe is doing in the digital media and marketing space, as well as how its acquisitions are working out. Most importantly, we will look closely for any announcements related to its cloud and tablet ambitions. Adobe competes with Apple (NASDAQ:AAPL), Quark and Corel in creative software, and Google (NASDAQ:GOOG) Analytics in web analytics.
Creative Cloud – Adobe’s Pièce de résistance
Adobe has a dominating presence in the the creative software space thanks to the continuing success of its Creative Suite. It derives a major portion of its revenues from Creative software like Photoshop, which is why Creative Cloud is expected to be one of its most important releases to date.
The company is currently trying to steer customers to a subscription-based model, which will offer instant software upgrades, synchronization between multiple devices, and free online storage. With this move, Adobe hopes to streamline the upgrade process, and also generate a steady stream of revenue instead of bursts of revenue driven by its software upgrade cycle.
Adobe will be launching Creative Cloud with Creative Suite 6 in the first half of 2012, and we expect to see more details about expected adoption rates and its product strategy in the earnings call.
Creative Software will launch on multiple tablet platforms like Android and the iPad recently, and it should drive a sizable amount of sales in the coming quarters, as the tablet market continues to expand rapidly. Though we expect apps like Photoshop Touch to sell like hotcakes, Adobe’s gross profit margin could take a hit, given the much lower standard pricing of tablet apps. However, we expect Adobe’s tablet apps to drive further sales of Creative Cloud subscriptions, as users move to a model where they can access data on any device easily.
The last quarter was the best ever in Adobe’s history. We expect Adobe’s revenue growth to continue in the coming years, as its focus on its digital media and marketing businesses pays off.
We currently have a $34 Trefis price estimate for Adobe, which stands marginally above its market price. Creative Software accounts for nearly 50% of its total value.