Adobe Earnings Preview: Cloud Growth In Focus Yet Again

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Adobe

Adobe (NASDAQ:ADBE) is set to announce its fiscal Q2 2015 earnings on June 16th. (Fiscal year ends with November.) While the company delivered $1.109 billion in revenues in Q1, which was at the high-end of its targeted range of $1.05 billion to $1.10 billion, its non-GAAP earnings per share of $0.44 exceeded its guidance. However, these numbers failed to enthuse the market, which was expecting a higher growth rate. Adobe’s core cloud business continued to deliver results as cloud adoption remained robust across both its Creative Cloud offering and its marketing solutions. For Q2, we believe the growth trend in cloud adoption continued, which likely drove revenues for both the Creative cloud (CC) and marketing divisions. Nevertheless, we believe revenues from the LiveCycle and Connect business declined as that of the Print and Publishing business remained flat during the quarter.

Check out our complete analysis of Adobe

Outlook For 2015 and Q2

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Adobe has guided for revenues of $1.125 billion to $1.175 billion for the second quarter of fiscal 2015. It indicated GAAP EPS would be in the range of $0.20 to $0.25, and non-GAAP EPS between $0.41 and $0.47. It expects CC  net new subscriptions and Digital Media ARR to grow sequentially in Q3 and Q4. However, it expects the LiveCycle and Connect business and the print and publishing business to remain flat in Q2 2015.

The company still maintains its CC subscription guidance at 5.9 million paid CC individual and team subscriptions by the end of fiscal 2015.  According to our calculations, this means it will need to add over 160,750 paid users per week in the remaining three quarters 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 25% for the year. The revenue guidance for FY2015 is $4.85 billion, while GAAP EPS and Non-GAAP EPS is expected to be $1.20 and $2.05, respectively.

Growth In Cloud Services To Continue

According to our estimates, the Creative Cloud division is the biggest of Adobe’s operating segments and makes up  63.5% of its value. We expect the company to report $2 billion in average revenues run-rate (ARR) for this product family in 2015, which is approximately twice last year’s level. Offsetting this to some degree will be a corresponding decline in packaged software sales, which includes point and suite licenses.

Over the past year, Adobe’s cloud subscription service has witnessed robust growth as clients have increasingly adopted these services to drive collaborative development efforts across their companies. The primary reason for this has been new additions to its Creative cloud offering as the company added more features. The company has announced that it will exit 2015 with 5.9 million CC subscribers. In Q1, Adobe added 517,000 million subscribers to its CC services. For the subscriber base to grow to guided levels 2015, we estimate that it will have to report an addition of at least 700,000 subscribers for Q2 as this quarter is generally the strongest. Considering the trend in Q1, we believe that this addition for Q2 is achievable. Additionally, we expect that the growth in licensing can come from enterprise term licensing agreements (ETLA), as has been the trend over the past few quarters. Therefore, we believe that CC will continue to drive revenue over the next couple of years.

Revenues From Marketing Cloud To Grow

Adobe’s cloud marketing division is the second biggest division and makes up 17.7% of its value in our model. Over the past few years, Adobe has built a comprehensive digital marketing platform that addresses most of the needs in digital marketing. The company has scaled up the functionality and product offering of its marketing platform through organic and inorganic means. Having been built from the acquisition of Omniture, the business has had a compounded annual growth rate (CAGR) of 83% over last five years. It generated around $1.2 billion in annual revenues in 2014. We believe that this platform provides a cost effective portfolio of digital marketing solution for companies that can manage marketing campaigns across different channels and devices. We expect Adobe’s marketing platform to continue to lead the digital marketing solutions market in the short term, as it enjoys strong brand recognition. Adobe is aiming to increase its revenues from cloud-based marketing solutions by expanding in new geographies and verticals where it has a strong presence. We expect that, as Adobe continues to develop its marketing solutions capabilities, this division will emerge as an important driver for revenue growth. In this earnings announcement, we expect the company to report growth in revenues from new verticals, especially from mobile. Additionally, since many of Adobe’s digital marketing solutions leverage growth in big data analytics, mobility and social media, we expect the company to post incremental revenues from these sources in Q2.

Acrobat Family Revenue To Grow

Acrobat family is the third largest division and makes up 11.4% of Adobe’s estimated 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. The company has amassed over 2.17 million subscribers for document cloud service in 2014. We expect this trend to continue in 2015 as well, and forecast the subscriber base to grow to 8.83 million by the end of our forecast period. Furthermore, as this service gains momentum, we expect the ARPS to increase from $8.00 in 2014 to $12.70 by the end of our forecast period in 2021.

We currently have a $70.22 price estimate for Adobe, which is 13.7% below the current market price.

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