Adobe Earnings Preview: Creative Cloud And New Marketing Products To Deliver Growth

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Adobe (NASDAQ:ADBE) is set to announce its fiscal Q3 2015 earnings on September 17th. (Fiscal years end with November.) While the company delivered $1.162 billion in revenues in Q1, which is at the high end of its targeted range of $1.125 billion to $1.175 billion, its non-GAAP earnings per share of $0.48 exceeded its guidance. 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 Q3, 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

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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. Management expects CC net new subscriptions and Digital Media Annualized Recurring Revenue (ARR) to grow sequentially in Q3 and Q4. Adobe also expects Adobe Cloud Revenue to grow 21% year over year. 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. 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  ARR. Furthermore, Adobe expects revenues from its digital marketing cloud to grow by 24% for the year in the second half and bookings 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.

Growth In Cloud Services To Continue

According to our estimates, the Creative Cloud (CC) division is the biggest of Adobe’s operating segments and makes up 64% of its value. Considering the addition of new users for CC in the last two quarters, we expect the company to report $2.1 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. In Q2, Adobe added 639,000 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 650,000 subscribers for Q3 as this quarter is generally one of the strongest. Considering the trend in H1 i.e. Q1 and Q2, we believe that this addition for Q3 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.

Focus on Revenue Growth From New Marketing Cloud Products

Adobe’s cloud marketing division is the second biggest division and makes up 17.5% 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. This platform provides a cost effective portfolio of digital marketing solution for companies that can manage marketing campaigns across different channels and devices and Gartner consistently ranks its products among the best solutions for digital marketing.

Adobe introduced new products (Adobe Audience Manager and Adobe Primetime) in Q2. We expect Adobe’s marketing platform to continue to lead the digital marketing solutions market in the short term on the back of new product releases as it enjoys strong brand recognition. 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 Q3.

We currently have a $80.74 price estimate for Adobe, which is inline with the current market price.

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