Adobe Earnings Preview: Creative And Marketing Cloud Revenues To Grow

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Adobe (NASDAQ:ADBE) is set to announce its fiscal Q3 2016 earnings on September 20th. (Fiscal years end with November.) While the company delivered $1.39 billion in revenues in Q2, which is at the high-end of its targeted range of $1.35 billion to $1.40 billion, its non-GAAP earnings per share of $0.71 exceeded its guidance.  That said, year-to-year revenue growth was 20.3%.  Adobe’s core cloud business continued to deliver results as cloud adoption remained robust across both its Creative Cloud offering and its marketing solutions. However, the growth rate for both division was slower than expected, indicating a minor slowdown in adoption.

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 2016 and Q3

Adobe has guided for revenues of $1.42 billion to $1.47 billion for the third quarter of fiscal 2016. It indicated that GAAP EPS would be in the range of $0.46 to $0.52, and non-GAAP EPS between $0.69 and $0.75. Management expects CC net new subscriptions and Digital Media Annualized Recurring Revenue (ARR) to grow sequentially in Q3 and Q4. However, it expects the LiveCycle and Connect business and the print and publishing business to remain flat in Q3 2016. While the company is not giving guidance for its CC revenues, we expect that CC subscription to grow to 9 million paid CC individual and team subscriptions by the end of fiscal 2016.

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 49% of its value. Considering the addition of new users for CC in the last two-quarters, we expect the company to report $3 billion in average revenues run-rate (ARR) for this product family in 2016, which is approximately 50% higher than 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. For the subscriber base to grow to our projected 9 million, we estimate that it will have to report an addition of at least 500,000 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. However, as the company is improving its portfolio of services by adding products at lower price points, we expect the company to report a minor decline in average revenue per user (ARPU) during the quarter. Nevertheless, 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 28% 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 both organic and inorganic means. Having been built from the acquisition of Omniture, the business has had a compounded annual growth rate (CAGR) of 70% over last five years. This platform provides a cost-effective portfolio of digital marketing solutions for companies that can manage marketing campaigns across different channels and devices.  Gartner consistently ranks its products among the best solutions for digital marketing and customer relationship management (CRM).

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 Primetime, a multi-screen TV platforma that enables the dynamic placement of ads on over the top (OTT) live video feeds. Additionally, since many of Adobe’s digital marketing solutions leverage the growth in big data analytics, mobile devics and social media, we expect the company posted incremental revenues from these each of these sources in Q3.

We currently have a $103.06 price estimate for Adobe, which is 4% above the current market price.

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