Adobe Earnings: Cloud Services Deliver Another Quarter Of Growth

Adobe (NASDAQ:ADBE) posted its Q1 results (fiscal years ending with November) Tuesday, March, 18, and and the market reacted positively to the results as the stock traded higher in after market hours. In the earnings announcement, the company once again reported faster-than-expected adoption of subscription licenses for its Creative Cloud (CC) business, as more of its clients chose annual subscription plans. The company reported over 1.8 million paid subscribers for the CC services, a sizable increase of 405,000 over the previous quarter. This generated nearly a billion dollars in annualized recurring revenue (ARR) in the quarter, and for the first time the cloud subscription revenue exceeded the revenue from perpetual license sales. Adobe also witnessed significant growth in its marketing cloud initiatives during the quarter as revenues grew by 24% year over year to $267 million. However, its LiveCycle software and print and publishing businesses (all relatively small) declined by 10% and 14% respectively.

The company reported diluted earnings per share (EPS) of $0.09 on a GAAP-basis and $0.30 on a non-GAAP basis. However, the revenues were flat year on year at $1 billion, which is at the high end of its targeted range of $950 million to $1.0 billion. We examine some of Adobe’s key drivers below and its outlook for 2014. ^[1]

Check out our complete analysis of Adobe

Outlook For Q2 FY14 And Beyond

Adobe has guided for revenues of $1.00 billion to $1.05 billion for the second quarter of fiscal 2014. It indicated GAAP EPS would be in the range of $0.06 to $0.12, and non-GAAP EPS between $0.26 and $0.32.

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.

Strong subscription Buoys Creative Cloud Division

According to our estimates, the Creative Cloud division is the biggest of Adobe’s operating segments and makes up approximately 55% of its value. During the quarter, the company added 405,000 new subscribers, and 96% of the creative cloud subscribers have signed up for annual contracts. Additionally, 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 28% sequentially to $987 million ARR, and subscriber base grew to 1.844 million. The company added 31,153 new subscribers per week in Q1. We expect the company to maintain this subscription rate for 2014 and add 3 million CC subscribers by the end of 2014.

Strong Adoption of Marketing Platform Boosts Revenues

Adobe’s cloud marketing division is the second biggest division and makes up 21% of its value. Over the past few years, Adobe has built a comprehensive digital marketing platform that addresses most of the needs in digital marketing. This build up started in 2009 with the acquisition of Ominiture. Since, the company has scaled up the functionality and product offering of its marketing platform, through organic and inorganic growth.

During the quarter, Adobe witnessed strong growth in its marketing cloud services. In Q1, this division reported a 24% year-over-year increase in revenue to $267 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 bookings to grow at a 30% CAGR, and revenues to grow at a 20% CAGR by 2016. While this division contributed 20% to Adobe’s total revenues in 2013, we expect it to increase to 24% by 2020.

Adoption of EchoSign and Document Cloud Services Buoys Revenues At Acrobat Family Division

Adobe Acrobat family is the third largest division at Adobe and makes up 11% of its value. In the past few quarters, revenues from this division have been on a decline, primarily due to launch of document cloud services that have subscription fee spread over the period of usage. However, due to strong adoption of online document services, EchoSign (An electronic content management system) and growth in Enterprise Term Licensing Agreements (ETLAs) for Acrobat, the company witnessed 14% growth in Acrobat ARR. We expect document services’ ARR to drive revenue growth in the Acrobat family division in the future.

We currently have a $51 price estimate for Adobe, which is around 25% below the current market price.

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1. Adobe SEC Filings, www.sec.gov, March 19, 2014 [↩]