Adobe Earnings: Cloud Growth Continues To Buoy Revenues

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Adobe (NASDAQ:ADBE) posted its fiscal Q4 results on Thursday, December 10th.  (Fiscal years end with November.) Adobe stock was up 5% in after-hours trading, after the company released its earnings. The company continued to report growth in its cloud revenues with Creative Cloud (CC) at the forefront. The company added 833,000 Creative Cloud (CC) subscriptions in the quarter, a 15.6% increase over the prior quarter.

Adobe’s annualized recurring revenue (ARR) reached nearly $2.6 billion for the CC business and $2.9 billion (an increase of $1.1 billion for the year) for its digital media business, which includes creative and document cloud products. Digital Marketing revenue also grew by 2.3% year over year, with marketing cloud reporting 6.6% growth. Its waning LiveCycle software revenues declined by 30% to $30.5 million, while the print and publishing business (all relatively small) declined by 4%. In this note, we will examine some of Adobe’s key drivers and its outlook for FY2016. [1]

Check out our complete analysis of Adobe

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Outlook For 2016 and Q1

Adobe has guided for revenues of $1.30 billion to $1.35 billion for the first quarter of fiscal 2016. It indicated that GAAP EPS would be in the range of $0.33 to $0.39, 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 $3.875 billion. Furthermore, Adobe expects revenues from its digital marketing cloud to grow by 20% for the year 2016 and bookings to increase by 30%. The revenue guidance for FY2016 is $5.7 billion, while GAAP EPS and Non-GAAP EPS is expected to be $1.80 and $2.70, respectively.

Strong CC Subscription Fillips Revenues And ARR

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 833,000 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. Furthermore, subscription growth was fueled by the continued migration of the Creative Suite installed base, as well as the addition of customers that are new to Adobe’s creative products. As a result, CC ARR neared the $2.6 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.

Adoption of Marketing Platform Continues, Albeit At a Lower Rate

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 Q4, this division reported a 7.5% year-over-year increase in revenue to $352 million achieving annual bookings growth goal of approximately 30%. However, this growth rate was lower compared to earlier rates.

The company stated that Adobe Marketing Cloud measures 80% of all online transactions from the top 100 U.S. retailers, and over $7.50 out of every $10 spent online with the top 500 U.S. retailers. 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.

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 20% rate through the 2016- 2018 period, which is in line with the company’s expectations.

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 the launch of document cloud services that have subscription fee spread over the period of usage. Q4 Document Cloud revenue was $209 million and the document Cloud ARR grew to $397 million in 2015. 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 $81.20 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, December 10 2015 []