Tablets & New Software to Drive Adobe’s Growth in Q4
Adobe (NASDAQ:ADBE) posted its Q3 FY11 results on September 20, announcing another billion dollar revenue quarter. However, the growth in revenues has been an underwhelming 2% year on year. The revenues from products fell slightly, but it was compensated by increases in revenues from subscriptions and support. In our earnings preview for Adobe, we stated that Adobe’s growth will be driven primarily by sales of its Creative software suite and document tools like Acrobat etc. Adobe competes with Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), Quark and Corel in the creative software market.
Following the updated earnings results and the revised outlook, we have revised our Trefis price estimate for Adobe to $35, which stands around 40% above the current market price.
Creative Software Sales Flat, Acrobat Sales Increase
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Creative software sales were flat this quarter. Since Creative software accounts for almost 50% of Adobe’s Trefis price estimate and a major share of its revenue, the slump in its revenues is largely responsible for Adobe’s sluggish revenue growth.
Going forward we expect Creative software sales to increase following the launch of new software like Adobe Edge, its HTML 5 authoring tool, and Adobe Muse, a website creating tool. Adobe is continually improving its Creative software offering, which will eventually lead to an increase in sales.
Adobe Acrobat sales, accounted for under the Knowledge Worker division grew almost 7%. Adobe continues to invest in the platform and add new features. It recently acquired EchoSign, to add advanced digital signature capabilities to Acrobat, and it also launched PDF creation tools on the iOS platform. Considering all of this, we expect Acrobat revenues to grow even more in the near future.
Adobe Posts a Positive Outlook for Q4 FY11, Focuses on Improving Operating Margins
Adobe has posted a positive growth outlook for Q4. It expects stable, sequential growth in all business segments except Print and Publishing, revenues from which fell 7% this year. They are targeting revenues of 1.075 to 1.125 billion (YoY growth of ) , which is easily achievable if the economy doesn’t play spoilsport. They are also trying to improve the operating margins to 29.5%, up from the current 26.5%.
Going forward, Adobe’s growth will depend on how it carries forward its dominance in the computing market to the mobile and tablet markets. Flash has been ignored by most tablet platforms, including iOS and the upcoming Windows 8, but Adobe plans to cash in on the shift to mobile platforms by releasing new HTML 5 tools and technologies like Adobe Air, and porting its products to tablets.