Adobe Earnings: Creative Cloud & Cloud Services Deliver Another Quarter Of Growth

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Adobe (NASDAQ:ADBE) posted its Q4 results (fiscal years ending with November) Thursday, November 11th and the market reacted positively to the results driving the stock up nearly 10%. 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 3.454 million paid subscribers for the CC services, a sizable increase of 644,000 over the previous quarter. This generated over $1.5 billion in annualized recurring revenue (ARR) in the quarter. Adobe also witnessed growth in its marketing cloud initiatives during the quarter as revenues grew by 4.5% year over year to $330 million. Its LiveCycle software revenues declined by 9%, while print and publishing business (all relatively small) grew by 5.4%.

The company reported diluted earnings per share (EPS) of $0.14 on a GAAP-basis and $0.36 on a non-GAAP basis. The revenues grew by 3% year on year to $1.07 billion, which is at the high end of its targeted range of $1.0 billion to $1.075 billion. During the earnings announcement, the company said that it it has entered into a definitive agreement to acquire privately held Fotolia, a leading marketplace for stock content. Fotolia will be integrated into Adobe Creative Cloud. Furthermore, it also provided guidance for the coming fiscal year. We examine some of Adobe’s key drivers below and its outlook for 2015. [1]

Check out our complete analysis of Adobe

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Outlook For 2015 and Q1

Adoption of cloud services continues to remain strong and the company expects to have nearly 5.9 million paid CC individual and team subscriptions by the end of fiscal 2015. (Fiscal year end with November.)  According to our calculations, this means it will need to add over 47,030 paid users per week in FY2015 to meet its objective. The company has also disclosed that it expects to end FY 2015 with over $2.9  billion of digital media Annualized Recurring Revenue (ARR) 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 year. However, it expects the LiveCycle and Connect business to decline further, while the print and publishing business is expected to remain flat in 2015. The revenue guidance for FY2015 is $4.85 billion, while GAAP EPS and Non-GAAP EPS is expepected to be $1.2 and $2.05 respectively.

Adobe has guided for revenues of $1.05 billion to $1.10 billion for the first quarter of fiscal 2015. It indicated GAAP EPS would be in the range of $0.14 to $0.20, and non-GAAP EPS between $0.34 and $0.40.

Strong CC Subscription Buoys Revenues, But CS6 Phase Out Impacts Growth

According to our estimates, the Creative Cloud division is the biggest of Adobe’s operating segments and makes up approximately 66% of its value. During the quarter, the company added 644,000 new subscribers, and 96% of the creative cloud subscribers have signed up for annual contracts. The growth in licensing continued to stem from individual, team and enterprise term licensing agreements (ETLA), which usually have tenure of three years. This indicates that CC will continue to drive revenue over the near foreseeable future as adoption across all offering remains strong. The revenue from CC increased by over 20% sequentially to $1.676 billion in ARR, and subscriber base grew to 3.454 million. The company added 49,538 new subscribers per week in Q4. We expect the company to maintain this subscription rate for 2015, and add 2.5 million more CC subscribers to the existing tally to reach over 6 million subscribers by the end of 2015.

Strong Adoption of Marketing Platform Boosts Revenues And Orders

Adobe’s cloud marketing division is the second biggest division and makes up 14% 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 then 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 Q4, this division reported a 118% year-over-year increase in revenue to $330 million. Furthermore, the company achieved record Adobe Marketing Cloud bookings in Q4 and were well ahead of its 30% annual growth target, primarily due to big deals in Q4. These deals were signed with companies that include Ford, FedEx, MasterCard, Morgan Stanley, QVC, Commonwealth of Pennsylvania, and US Dept.of Veterans Affairs. 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% in 2015.

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 8.5% 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 25% sequential, and 89% year-over-year growth in Acrobat ARR. We expect document services’ ARR to drive revenue growth in the Acrobat family division in the future.

We have updated our Adobe price estimate to $58.49, which is around 23% below the current market price.

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Notes:
  1. Adobe SEC Filings, www.sec.gov, December 11 2014 []