Adobe Earnings Recap: Cloud Boosts Revenues Across Divisions

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Adobe (NASDAQ:ADBE) posted its fiscal Q3 results on Thursday, September 17th.  (Fiscal years end with November.) The company added 684,000 Creative Cloud (CC) subscriptions in the quarter, a 14.7% increase over the prior quarter. While this growth was in line with our expectations, its outlook for 2015 continued to mildly disappoint The Street as the stock fell by 2% in after-hours trading Thursday.

We estimate that the company will have to add over 500,000 subscribers in the remaining three months to achieve its guidance of 5.9 million subscribers for 2015. However, considering the pace at which the company has added new subscribers, its more likely that the company will exceed this figure. The company generated over 74% of its digital media revenues from recurring sources, against 57% a year earlier. Adobe’s annualized recurring revenue (ARR) reached over $2.27 billion for the CC business and $2.65 billion for its digital media business, which includes creative and document cloud products. Digital Marketing revenue also grew by 7.5%, with marketing cloud reporting 27% growth. Its LiveCycle software revenues declined by 22%, while the print and publishing business (all relatively small) declined by 9.5%. In this note, we will examine some of Adobe’s key drivers and its outlook for remaining three months of FY2015. [1]

Check out our complete analysis of Adobe

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Outlook For 2015 and Q4

Adobe has guided for revenues of $1.275 billion to $1.325 billion for the fourth quarter of fiscal 2015. It indicated that GAAP EPS would be in the range of $0.32 to $0.38, and non-GAAP EPS between $0.56 and $0.62. It expects CC net new subscriptions and Digital Media ARR to grow for the year to $2.95 billion. The company still maintains its CC subscription guidance at 5.9 million paid CC individual and team subscriptions by the end of fiscal 2015. However, it expects lower revenue in Q4 than previously expected. It expects the LiveCycle and Connect business and the print and publishing business to remain flat in Q4 and 2015.

Furthermore, Adobe expects revenues from its digital marketing cloud to grow by 25% for the year in the fourth quarter 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.

Strong CC Subscription Continues

According to our estimates, the Creative Cloud division is the biggest of Adobe’s operating segments and makes up approximately 64% of its value. During the quarter, the company added 684,000 new subscribers. The growth in licensing continued to stem from individual, team and enterprise term licensing agreements (ETLA), which usually have tenure of three years. The growth was further accentuated by faster adoption of Lightroom and Photoshop Elements. The company said that its users are increasingly choosing the subscription offering rather than the perpetual offering for both these applications. As a result, CC ARR neared $2.3 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 $2.27 billion in ARR, and subscriber base grew to 4.61 million. We expect the company to improve this subscription rate over the remaining three months of 2015, and add over 650,000 million more CC subscribers to the existing tally to reach 6 million subscribers by the end of 2015.

Strong Adoption of Marketing Platform Boosts Revenues And Backlog

Adobe’s cloud marketing division is the second biggest division and makes up 17.5% 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. In Q3, this division reported a 7.6% year-over-year increase in revenue to $402.9 million. Furthermore, the company is driving larger, multi-year and multi- solution customer contracts. As a result of larger engagements and longer implementation cycles, it is witnessing strong growth in deferred revenue and unbilled backlog for marketing division.

During the quarter, Adobe witnessed strong growth in its marketing cloud services. The company had strong bookings for Marketing cloud in Q3, and record Marketing Cloud revenue of $368 million representing 27% year-over-year growth. 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.

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% 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 and growth in Enterprise Term Licensing Agreements (ETLAs) for Acrobat, the company witnessed 8.5% sequential, and 34% 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 are in the process of updating our model. At present, we have a $80.74 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, September 16 2015 []