Adobe Earnings: Cloud Boosts Revenues Once Again

Adobe (NASDAQ:ADBE) posted its fiscal Q3 results on Tuesday, September 20th. (Fiscal years end with November.) Adobe stock was up 6% in after-hours trading, after the company released its earnings, as the reported revenues ($1.464 billion) were near the higher end of its guidance range. The company continued to report growth in its cloud revenues with Creative Cloud (CC) at the forefront. The company reported that its Creative Cloud (CC) revenue grew by 39% in the quarter.

Adobe’s annualized recurring revenue (ARR) reached nearly $3.26 billion for the CC business and $3.7 billion  for its digital media business, which includes creative and document cloud products. Digital Marketing revenue also grew by 6.7% year over year, with marketing cloud reporting 10% growth. Its waning LiveCycle software revenues declined by 30% to $35.6 million, while the print and publishing business (all relatively small) declined by 2.6%. In this note, we will examine some of Adobe’s key drivers and its outlook for Q4 FY2016. ^[1]

Check out our complete analysis of Adobe

Outlook For Q4 And 2016

Adobe has guided for revenues of $1.55 billion to $1.60 billion for the fourth quarter of fiscal 2016. It indicated that GAAP EPS would be in the range of $0.60 to $0.66, and non-GAAP EPS between $0.83 and $0.89. It expects CC net new subscriptions and Digital Media ARR to grow for the year to $4 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 $5.80-$5.85 billion, while GAAP EPS and Non-GAAP EPS is expected to be $2.12-2.18 and $2.94-3.00, 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 contributes approximately 49% of its value. During the quarter, the company reported that it added net new subscribers for its CC but did not disclose the exact number. The growth in licensing continued to stem from individual, team and enterprise term licensing agreements (ETLA), which usually have a term 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 was $3.26 billion mark for the quarter.

Additionally, Creative Cloud (CC ) ARPU across each of its commercial offerings continues to grow quarter on quarter as new users on promotion pricing renew at full price after their promotions expire. 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

Adobe’s cloud marketing division is the second biggest division and makes up 27.5% 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 10% year-over-year increase in revenue to $404 million achieving annual bookings growth goal of approximately 30%.

The company stated that Adobe Marketing Cloud managed a record 23 trillion data transactions. 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.

We are in the process of updating our model. At present, we have a $103.65 price estimate for Adobe, which is inline with the current market price.

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1. Adobe SEC Filings, www.sec.gov, September 20 2016 [↩]