Adobe Earnings: Cloud Adoption Continues Unhindered

Adobe (NASDAQ:ADBE) posted its Q2 results (fiscal years ending with November) Tuesday, June 17. The market reacted positively to the results as the company delivered $1.068 billion in revenue, with non-GAAP earnings per share of $0.37, both exceeding the high end of its targeted ranges. 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 2.3 million paid subscribers for the CC services, a sizable increase of 464,000 over the previous quarter. This generated nearly $1.2 billion in Annualized Recurring Revenue (ARR) in the quarter. The company also announced that it is now solely focusing on licensing CC, and Q2 marked the end of sales of the perpetual Creative Suite 6 license. Adobe also witnessed significant growth in its marketing cloud initiatives during the quarter as revenues grew by 23% year over year to $282.9 million. However, its LiveCycle software and print and publishing businesses (all relatively small) declined by 10% and 14% respectively. We examine some of Adobe’s key drivers below and its outlook for 2014. ^[1]

Check out our complete analysis of Adobe

Outlook For Q3 FY14 And Beyond

Adobe has guided for revenues of $975 million to $1.25 billion for the third quarter of fiscal 2014. It indicated GAAP EPS would be in the range of $0.02 to $0.8, and non-GAAP EPS between $0.22 and $0.28.

Due to excellent adoption of cloud services, Adobe now expects to have nearly 3.3 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 38,100 paid users per week in the second half of FY2014, 80% more than the 2013 weekly subscription rate of 21,000. 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 25% in 2014. 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 464,000 new subscribers and 97% 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 a 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 21% sequentially to $1.2 billion in ARR (resolved above) and the subscriber base grew to 2.308 million. The company added 35,700 new subscribers per week in Q2. Considering the pace of CC adoption, we now expect the company to add over 3.3 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. Adobe continued to witness strong growth in its marketing cloud services and revenues grew by 23% year over year to $283 million. Additionally, 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. Total document services subscriptions spanning EchoSign, Create PDF Online and related services grew to 1.9 million at the end of Q2. We expect document services’ ARR to drive revenue growth in the Acrobat family division in the future.

We are in the process of updating our Adobe model. At present, we have a $51 price estimate for Adobe, which is around 30% below the current market price.

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1. Adobe SEC Filings, www.sec.gov, June 17, 2014 [↩]