Adobe Earnings Preview: Growth in Cloud Revenues To Boost Topline

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Adobe (NASDAQ:ADBE) is set to announce its fiscal Q4 2015 earnings on December 10th. (Fiscal years end with November.) For Q4, we believe the growth trend in cloud adoption continued, which likely drove revenues for the Creative cloud (CC), Marketing and Acrobat 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. Therefore, we continue to monitor the subscription growth for its CC, Document and Marketing units.

Check out our complete analysis of Adobe

Outlook For 2015 and Q4

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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 and Digital Media Annualized Recurring Revenue (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 is guiding to 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.

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 63.8% of its value. Considering the addition of new users for CC in the last three-quarters, we expect the company to report $2.4 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.

In Q3, Adobe added 684,000 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 Q4. Considering the trend in the last nine months, we believe that the company will exceed its guidance and add close to 700,000 subscribers in Q4. 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 17.4% 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. This platform provides a cost-effective portfolio of digital marketing solutions 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 offers six products under its marketing cloud solution. The Adobe marketing cloud includes a complete set of analytics, social media optimization, consumer targeting, web experience management and cross-channel campaign management solutions. Recently, the company augmented its Marketing Cloud solutions with the acquisition of comScore’s Digital Analytix business. [1]

In this earnings announcement, we expect the company to report growth in revenues from new verticals, especially from mobile devices. 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 Q4.  Currently, we project revenues from its digital marketing division to reach $3.54 billion by the end of our forecast period in 2022.

We currently have a $81.20 price estimate for Adobe, which is 13% below the current market price.

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Notes:
  1. Adobe Systems-ComScore Deal Bulks Up Marketing Cloud, November 5 2015 []