Adobe Earnings: Revenue Growth Disappoints Markets

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Adobe (NASDAQ:ADBE) posted its Q3 results (fiscal years ending with November) Tuesday, September 16. The market reacted negatively to the results as growth in company’s revenue failed to live upto its expectations. While the company delivered $1.005 billion in revenue, just $10 million below consensus but enough of a miss to send the shares down about 5%.  That said, non-GAAP earnings per share of $0.28 exceeded both its guidance and market expectation. However, 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 2.8 million paid subscribers for the CC services, a sizable increase of 500,000 over the previous quarter. This generated nearly $1.4 billion in Annualized Recurring Revenue (ARR) in the quarter. The company said that revenue from creative division suffered as the company phased out sale of sales of the perpetual Creative Suite 6 license in Q2. Adobe continued to witness significant growth in its marketing cloud initiatives during the quarter as revenues grew by 14% year over year to $290.1 million. However, revenues from the LiveCycle software business (relatively small) declined by 18%, and printing and publishing were flat. We examine some of Adobe’s key drivers below and its outlook for Q4 2014. [1]

Check out our complete analysis of Adobe

Outlook For Q4

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Adobe has guided for revenues of $1.025 billion to $1.075 billion for the fourth quarter of fiscal 2014. It indicated GAAP EPS would be in the range of $0.05 to $0.11, and non-GAAP EPS between $0.26 and $0.32.

Adoption of cloud services continued to remain strong and the company expects to have nearly 3.3 million paid CC individual and team subscriptions by the end of fiscal 2014. (Fiscal years end with November.)  According to our calculations, this means it will need to add over 38,100 paid users per week in the final quarter of FY2014. 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 a 25% rate for the 2014 to 2016 period. 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 CC Subscription Buoys Revenues, But CS6 Phase Out Impacts Growth

Digital Media division, which maps onto out CC division and Acrobat Family division, reported that its revenues declined by 2.5% year over year to $621.4 million during the quarter. The overall revenues were negatively impacted as the company phased out sales of perpetual licenses of Creative Suite 6, despite the strong growth in CC revenues.

According to our estimates, the Creative Cloud division is the biggest of Adobe’s operating segments and makes up approximately 58% of its value. During the quarter, the company added 500,000 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 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 17% sequentially to $1.4 billion in ARR (resolved above) and the subscriber base grew to 2.81 million. 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 17% year over year to $290 million. Additionally, the revenue run rate exceeded $1.4 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 25% CAGR by 2016. While this division contributed 20% to Adobe’s total revenues in 2013, we expect it to increase to 24% by 2020.

We are in the process of updating our Adobe model. At present, we have a $58 price estimate for Adobe, which is around 20% below the current market price.

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Notes:
  1. Adobe SEC Filings, www.sec.gov, September 16, 2014 []