What Are We Expecting From Adobe?

In 2016, Adobe (NASDAQ:ADBE) reported 22% growth in revenues to $5.85 billion. While the performance metrics reported growth across two of its major business lines (i.e., Creative Cloud and Marketing Cloud), its legacy business continues to suffer. According to our estimates, Adobe’s annualized recurring revenues (ARR) are expected to exceed $4.9 billion for its digital media business, which includes creative and document cloud products. Its Marketing cloud expected to clock in another year of double-digit growth in 2017, in the mid-twenties.

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Adobe’s Guidance For 2017

Adobe guided that the revenue for FY2017 will be $7.09 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 over 25% for the year 2017 and average subscription value (ASV) bookings to increase by 30%. It also expects that the GAAP and non-GAAP tax rate will be around 21%.

Growth At Creative Cloud To Continue In 2017

The Creative Cloud (CC) division makes up 50% of Adobe’s estimated value. The key drivers for this division are the average revenue per subscriber and total creative software market. While Creative Cloud contributed nearly 53.4% to Adobe’s revenue in 2016, the total addressable base for Adobe’s creative products stood at 18.6 million, according to our estimates. In 2017, we expect Adobe to exit with 10.54 million subscribers for its CC services, which translates into a growth rate of nearly 16% over 2016’s 9 million. This figure represents ~54% of the 20 million of TAM.

Average revenue per subscriber (ARPS) for the company consists of a blend of subscribers that have enrolled into different levels of cloud services. While access to the complete Creative Cloud suite costs $74.99 per month, access to standalone Photoshop is priced at $9.99 per month. We estimate that the blended ARPS for the company was $28.69 in 2016. The recent trend in subscriptions indicates that users are subscribing to de-itemized versions of the software of CC instead of the full version of Creative Cloud. This leads us to believe that the ARPS will decrease in 2017 to $28. However, the company also reported good growth in its enterprise term licensing agreements (ETLA), which have a tenure of three years. This should mitigate the decline in ARPS to some extent in the future.

Marketing Cloud To Grow Due To Organic And Inorganic Growth

Adobe’s Cloud Marketing division is the second biggest division and makes up 27% of its value. Over the past few years, Adobe has built a comprehensive digital marketing platform that addresses most of the needs in digital marketing. The Adobe marketing cloud includes a complete set of analytics, social media optimization, consumer targeting, web experience management and cross-channel campaign management solutions. It generated around $1.63 billion in 2016.

Having been built through acquisition, the business has had a compounded annual growth rate (CAGR) of 28% over last five years. Adobe is aiming to increase its revenues from cloud-based marketing solutions by expanding in new geographies and verticals. Recently it has acquired TubeMogul, which should further strengthen its foothold in the digital marketing industry. According to the company, the marketing cloud is easily a $10 billion opportunity. Well-positioned in a growing market, this division is expected to witness a robust growth of close to 25% in 2017. Trefis projects revenues from its digital marketing division to grow to $2 billion by the end of 2017.

Document Cloud To Boost 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 years, 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. 2016 document revenue was $764.8 million and the document Cloud revenue grew to $431.3 million or 56.38% of document revenues 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.

Transition to Cloud Services to Negatively Impact Smaller Divisions

Smaller divisions of Adobe, which include Adobe packaged software, LiveCyle software and Print & Publishing, contribute 2.3% of its estimated value. The adoption of Creative Cloud will negatively impact Adobe’s packaged software, while up-selling to Adobe marketing cloud will pressure LiveCyle & Connect pro revenues. We expect revenues from these divisions to decline in 2017. We estimate average selling price of LiveCycle software will decline in 2017 to $68,130. We also expect the number of licenses sold for the division to decline.

Adobe’s Printing and Publishing software enhance printing and publishing standards. They are integrated with high-end printers to bring about high print quality. This segment also includes software used to provide distance education or e-learning. The advent of cloud software is also impacting this division. Trefis expects that revenue for this division will decline to $172 million in 2017.

We have a $107 price estimate for Adobe, which is inline with the current market price.

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