Adobe (NASDAQ:ADBE) posted its Q3 earnings on September 17, and the market reacted positively to the results as the stock traded 8% higher in after market hours. With the release of fourth-quarter results yesterday, the company once again reported faster-than-expected adoption of subscription licenses for its Creative Cloud (CC) business, as more of its clients chose enterprise term licensing agreements(ETLA). (Fiscal years end with November.) The company reported over 1.4 million paid subscribers for the CC services, a sizable increase of 402 thousand over the prior quarter. This generated $768 million annualized recurring revenue (ARR) in the quarter, nearly 75% of total revenues. Adobe also saw significant growth in its marketing cloud initiatives. In Q4, digital marketing revenues grew by 20% year over year to $365 million. However, its LiveCycle software, document services and print and publishing businesses (all relatively small) declined by 30%, 5% and 11% respectively.
The company reported diluted earnings per share (EPS) of $0.13 on a GAAP-basis and $0.32 on a non-GAAP basis. Due to a change in its licensing model from perpetual to subscription, the company reported 10% year-over-year decline in revenues to $1.04 billion, and 60% year-over-year decline in net income to $65 million. This, however, is transient as the company encourages users to adopt the Creative Cloud. Additionally, the unearned revenue grew to $775.54 million due to change in the licensing policy. We examine some of Adobe’s key drivers below and its outlook for 2014. 
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Outlook For Q1FY14 And Beyond
Adobe has guided for revenues of $950 million to $1 billion for the first quarter of fiscal 2014. They indicated GAAP EPS would be in the range of $0.02 to $0.08, and non-GAAP EPS between $0.22 to $0.38.
Adobe expects to have nearly 3 million paid CC individual and team subscriptions by the end of fiscal 2014. According to our calculations, this means it will need to add over 30,000 paid users per week in 2014, 40% more than the 2013 weekly subscription rate of 21,000. This would give the company total annual recurring revenue of approximately $1.6 billion from CC. The company has also disclosed that it expects to end the year with over $2.5 billion of Digital Media revenue at a growth rate of 20% year over year. Furthermore, Adobe expects revenues from its digital marketing cloud to grow by 20% year over year. However, it expects the LiveCycle and Connect business to decline further, while the Print and Publishing business is expected to remain flat in 2014.
Creative Cloud Buoys Creative Software Division
According to our estimates, the Photoshop and Creative Software division is the biggest of Adobe’s operating segments and make up approximately 55% of the company’s value. While this segment generated $630 million in revenues in Q4, it reported $2.62 billion revenues in 2013.
The division results were buoyed by the robust adoption of creative cloud subscription. During the quarter, the company added 402,000 new subscribers, up from 331,000 last quarter. Furthermore, 96% of the creative cloud subscribers have signed up for annual contracts, and 76% have subscribed to full creative cloud services. Most of the growth in licensing came from enterprise term licensing agreements (ETLA), which usually have tenure of three years. This indicates that CC will continue to drive revenue over the next couple of years. The revenue from CC increased by over 40% sequentially to $768 million ARR, and subscriber base grew to 1.439 million. The company added 30,000 new subscriber per week in Q4, which is 10% higher than weekly subscription rate of 27,000 in Q3. However, we expect that this subscription rate to remain flat for 2014, based on the 3 million subscribers that the company expects to have by the end of 2014.
Revenues Continue To Shrink At Acrobat Family Division
Adobe Acrobat family is the second largest division at Adobe and makes up 11% of its value. Acrobat family division reported 5% year-over-year decline in revenues to $198.4 million. The primary reason for this decline was lower sales of point product document services. However, an increase in revenue from Acrobat cloud services stemmed further decline in revenues.
During the quarter, company’s online document services surpassed 1.6 million subscriptions. ARR from Acrobat Cloud services grew 30% sequentially to $143 million, primarily due to increase in ETLAs. We expect document services’ ARR to drive revenue growth in the Acrobat family division in the future.
Adoption Of Digital Platform Lifts Digital Marketing Revenues
Omniture is Adobe’s third largest division and makes up 10% of its value by our estimates. Adobe acquired Omniture in 2009 and since then has included all of Omniture’s products under its digital marketing cloud division. During the quarter, Adobe witnessed strong growth in its marketing cloud services. In Q4, this division reported a 20% year-over-year increase in revenue to $365 million, and the revenue run rate exceeded $1 billion in annual revenue. 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 devices. Adobe expects new booking to grow at a 30% CAGR, and revenues to grow at a 20% CAGR by 2016. 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 are in the process of updating our Adobe model. At present, we have a $41.12 Trefis price estimate for Adobe, which is 30% below its market price.