Adobe Earnings: Cloud Revenues Across Divisions Continue To Deliver Growth

Adobe (NASDAQ:ADBE) posted its fiscal Q4 results on Thursday, December 15th. (Fiscal years end with November.) Adobe reported that its revenues grew by 24.8% to $1.61 billion, above 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 41.7% in the quarter.

Adobe’s annualized recurring revenue (ARR) reached nearly $4.01 billion for its digital media business, which includes creative and document cloud products. Digital Marketing revenue also grew by 27.6% year over year, with marketing cloud reporting 32% growth. Its waning LiveCycle software revenues declined by 22% to $23.8 million, while the print and publishing business (all relatively small) declined by 10%. In this note, we will examine some of Adobe’s key drivers and its outlook for Q1 FY2017. ^[1]

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Outlook For Q1 And 2017

Adobe has guided for revenues of $1.625 billion for the first quarter of fiscal 2017. It indicated that GAAP EPS would be in around $0.71, and non-GAAP EPS to be around$0.87. The revenue guidance for FY2017 is $6.95 billion, while GAAP EPS and Non-GAAP EPS is expected to be $2.85 and $3.75, respectively. It expects digital media revenues and digital media ARR to grow by 20% and 25%, respectively. Furthermore, Adobe expects revenues from its digital marketing cloud to grow by 20% for the year 2017 and average subscription value (ASV) bookings to increase by 30%.

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, Adobe achieved record Creative revenue of $886 million in Q4. For the year, Adobe achieved Creative revenue of $3.2 billion, which represents 38% year-over-year growth.

Additionally, Creative Cloud (CC) ARPU across each of its commercial offerings continues to grow quarter on quarter as the company introduced new products such as Adobe Stock.  Furthermore, Creative Cloud Photography Plan subscribers grew 1 million, which drove subscriber number. Strong adoption in CC products and services indicates that it will continue to drive revenue over the near foreseeable future as adoption across all offerings remains strong.

To ensure that adoption of CC continues, the company released two public betas: 1) Adobe XD for Windows – the first all-in-one tool for designing, prototyping and sharing user experiences for web and mobile apps; and, 2) Project Felix, a new application that enables designers to create photo-realistic composites with 2D images and 3D assets. We expect these launches will help the company to further improve its footprint in the creative industry.

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 Q4, this division reported a 32% year-over-year increase in revenue to $464.8 million achieving annual bookings growth goal of approximately 30%.

The company stated that Adobe Marketing Cloud managed record 33.5 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 big data analytics, mobility, social media and cloud computing to gain more traction across industries. As such, 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. The company expects ASV to grow at over 30% CAGR, and revenues to grow at a 20% rate through 2017- 2018 period.

Document Cloud Services Buoys Revenues At Acrobat Family Division

Adobe Acrobat family is the third largest division at Adobe and makes up 15% 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 $190 million and the document Cloud ARR grew to $475 million in 2016. The company reported that its document cloud subscriptions now eclipse licensing of perpetual Acrobat software on Adobe.com and it expects to see stronger migration among the enterprise customers in the coming year. 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 $104 price estimate for Adobe, which is inline with the current market price.

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1. Adobe SEC Filings, www.sec.gov, December 15 2016 [↩]