Adobe (NASDAQ:ADBE) is set to announce its Q2 CY 2013 earnings on Tuesday, June 18. In Q1 CY13, it reported a 3% y-o-y decline in revenues to $1 billion, but it saw an increase in its subscriber base for Creative Cloud services to 479,000, which translated to higher recurring revenue for Adobe’s Creative division.
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During Q2, Adobe changed its licensing model from perpetual to subscription based, and so we are keen to see the growth rate for Creative Cloud’s subscriber base in this upcoming earnings. Moreover, we are also interested to know how Adobe plans to deal with its installed base of Creative suite users who are hesitant to migrate to Creative Cloud once these services are launched on June 17.
Adobe launched its cloud services for the Acrobat family in 2012, and since then, revenue from document cloud services is on the rise. Since cloud service at the document division is central to Adobe’s growth in revenue from the Acrobat family, we will be closely monitoring the number of new Enterprise Term Licensing Agreements (ETLAs) signed in Q2. Additionally, we will be closely watching the growth rate at Adobe’s digital marketing division as we expect this division to be an important revenue driver for Adobe going ahead.
Outlook for Q2 CY13
For Q2 CY13, Adobe expects revenue in the $975 million–$1.02 billion range and non-GAAP earnings per share between 29-35 cents. Additionally, the company has projected that its subscriber base for Creative Cloud services will increase to 1.25 million by the end of this year.
Cloud Subscription Services To Bolster Revenue At Photoshop and Creative Software Division
According to our estimates, this division is the biggest of Adobe’s operating segments and makes up approximately 54% of the company’s value. This segment generated approximately $2.3 billion in revenue in 2012, and we expect this to grow to $4.2 billion by the end of our forecast period. Recently Adobe abandoned its Creative Suite (CS) entirely to focus its efforts on developing Creative Cloud (CC), which will replace the CS.
The company has guided that revenues from its Creative Cloud services will increase to $340 million in Q2, primarily due to an increase in the number of paid subscribers. In this earnings announcement, we will be closely monitoring the number of CC subscribers and the conversion rate of CS subscribers to CC. Moreover, we also want to know the increase in the number of trial and free users at creative cloud as these members have a higher propensity to pay for subscription services in the future.
Acrobat Family Division
Adobe Acrobat family is the second largest division at Adobe and makes up 13% of its value. Adobe launched its cloud document services in Q4 CY12, and since then revenue from these services has increased by 28%. Going ahead, we expect document services’ annual recurring revenue (ARR) will drive revenue growth at the Acrobat family division. Therefore, we will be closely monitoring the number of new licenses signed for the document services division and the ARR from previous ETLAs.
Omniture is Adobe’s third largest division and makes up 10% of its value by our estimates. Adobe acquired Omniture in 2011 and since then has included all of Omniture’s products under its digital marketing cloud division. As a result, Adobe witnessed strong growth in its marketing cloud services in previous years, and this division has emerged as an important driver for revenue growth at Adobe.
In Q1 CY13, this division reported a 20% y-o-y increase in revenue to $215 million. We expect that as big data analytics, mobility, social media and cloud computing gain more traction across industries, this division will report incremental growth in revenues as it has a portfolio of analytical tools that deal with marketing on social media and mobile. While this division contributed 12.5% to Adobe’s total revenues in 2012, we expect it to increase to 16% by the end of our forecast period.
We currently have a $37 Trefis price estimate for Adobe, which is 15% below its market price.