Adobe Earnings: Cloud Growth And Product Launch In Focus

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Adobe

Adobe (NASDAQ:ADBE) posted its fiscal Q2 results on Tuesday, June 16th. The company added 639,000 Creative Cloud (CC) subscriptions in the quarter, a 16% increase over the prior quarter. While this growth was in line with our expectations, its outlook for 2015 fell short of analyst expectations and the stock fell by 1.5% in after-hours trading Tuesday. The company expects that a strengthening dollar would negatively impact its topline by $80 million.

According to Trefis Estimates, the company will have to add over 1.3 million subscribers in the remaining six months to achieve its guidance of 5.9 million subscribers for 2015. During the quarter, the company generated over 72% of its revenues from recurring sources against 55% a year earlier. Adobe’s annualized recurring revenue (ARR) reached over $2 billion for the CC business and $2.35 billion for its digital media business, which includes creative and document cloud products. Its LiveCycle software revenues declined by 17.4%, while print and publishing business (all relatively small) grew by 4.1%.

The company reported diluted earnings per share (EPS) of $0.29 on a GAAP basis and $0.48 on a non-GAAP basis. The revenues grew by 11% year on year to $1.162 billion, which is at the high end of its targeted range of $1.125 billion to $1.175 billion. In this note, we will examine some of Adobe’s key drivers and its outlook for remaining six months of FY2015. [1]

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Outlook For 2015 and Q3

Adobe has guided for revenues of $1.175 billion to $1.225 billion for the third quarter of fiscal 2015. It indicated that GAAP EPS would be in the range of $0.23 to $0.29, and non-GAAP EPS between $0.45 and $0.51. It expects CC net new subscriptions and Digital Media ARR to grow sequentially in Q3 and Q4. Adobe also expects Adobe Cloud Revenue to grow 21% y-o-y. 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 50,000 paid users per week in the remaining two quarters to meet its objective. The company has also disclosed that it expects to end FY 2015 with over $2.925 billion of digital media Annualized Recurring Revenue (ARR). Furthermore, Adobe expects revenues from its digital marketing cloud to grow by 24% for the year in the second half and booking to increase by 30%. The revenue guidance for FY2015 is $4.85 billion, while GAAP EPS and Non-GAAP EPS is expected to be $1.21 and $2.05, respectively.

Strong CC Subscription Buoys Revenues

According to our estimates, the Creative Cloud division is the biggest of Adobe’s operating segments and makes up approximately 63.5% of its value. During the quarter, the company added 639,000 new subscribers. The growth in licensing continued to stem from individual, team and enterprise term licensing agreements (ETLA), which usually have a tenure of three years. As a result, CC ARR surpassed $2 billion mark during the quarter. Strong adoption of CC indicates that it will continue to drive revenue over the near foreseeable future as adoption across all offerings remains strong. The revenue from CC increased by over 12% sequentially to $2.02 billion in ARR, and subscriber base grew to 4.61 million. The company added 53,250 new subscribers per week in Q2. We expect the company to improve this subscription rate over the remaining six months of 2015, and add 1.3 million more CC subscribers to the existing tally to reach 5.9 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 17.7% of its value. Over the past few years, Adobe has built a comprehensive digital marketing platform that addresses most of the needs of digital marketers. 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 Q2, this division reported a 15.5% year-over-year increase in revenue to $326.6 million. Furthermore, the breadth of Adobe Marketing Cloud has been extended with two new solutions, Adobe Audience Manager and Adobe Primetime. Adobe Audience Manager is a data management platform that integrates online and offline data, enabling marketers to create and target audience segments in their multi-channel campaigns. Adobe Primetime is a multiscreen TV platform that helps broadcasters, cable networks and service providers create and monetize engaging and personalized TV and film experiences. Primetime emerged as the global leader in powering TV content across screens, including over-the-top devices such as Apple TV and Roku. Adobe said that it was partnering with content owners, programmers and pay-TV providers such as Major League Baseball Advanced Media to offer innovative programming across all screens. 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. We expect new bookings to grow at over 30% CAGR, and revenues to grow at a 25% rate in 2015, which is in line with the company’s expectations.

We are in the process of updating our model. At present, we have a $70 price estimate for Adobe, which is around 10% below the current market price.

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