Adobe Earnings Preview: Cloud Services Will Continue To Bolster Revenue Growth

Adobe (NASDAQ:ADBE) is set to announce its Q1 results on March 16. ^[1] In 2016, the company reported 22% growth in revenues to $5.85 billion, which was at the higher end of its guidance range. While the company saw improvement in performance metrics across two of its major business lines (Creative Cloud and Marketing Cloud), its legacy business continues to struggle. We expect that this trend continued in Q1 2017. Below we detail what to expect from the company’s earnings release. 

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

Adobe’s Guidance For 2017 & Q1

Adobe guided that revenue for FY2017 will be $7.09 billion, while GAAP EPS and Non-GAAP EPS are expected to be $2.85 and $3.75, respectively. It expects Digital Media revenues and Digital Media ARR (annualized recurring revenue) 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%.

For Q1, the company expects to post $1.64 billion for the top line, while GAAP EPS and Non-GAAP EPS are expected to be $0.71 and $0.87, respectively. The company expects to achieve approximately $225 million of net new Digital Media ARR. Furthermore, it expects Digital Media segment year-over-year revenue growth of approximately 19% and Adobe Marketing Cloud year-over-year revenue growth of approximately 24%.

Growth In Creative Cloud To Continue, Albeit At A Slower Pace

According to our estimates, the Creative Cloud (CC) division is the biggest of Adobe’s operating segments and makes up 50% of its value. The CC division continues to witness strong growth in net subscriptions. 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. We believe that the growth in licensing continued to stem from individual, team and enterprise term licensing agreements (ETLA), albeit at a slower pace. In Q1 2017, we expect Adobe to report $235 million in ARR for this product family, marginally above its guidance range.

Adobe’s clients continue to adopt CC as the company continues to add more products to its portfolio. Furthermore, it continues to add functionality for mobile devices, which is increasing the popularity of CC among creative designers. However, as the company is improving its portfolio of services by adding products at lower price points, we expect it 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.

Marketing Cloud Revenue To Grow

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 which includes a complete set of analytics, social media optimization, consumer targeting, web experience management and cross-channel campaign management solutions. It generated around $465 million in Q4 2016 and $1.63 billion in 2016.

Having been built largely through acquisitions, the business has had a compound annual growth rate (CAGR) of 28% over the last five years. Adobe is aiming to increase its revenues from cloud-based marketing solutions by expanding into new geographies and verticals. In December 2016, it completed the acquisition of TubeMogul, a leader in video advertising that enables brands and agencies to plan and buy video advertising across desktops, mobile, streaming devices and TVs. This acquisition should further strengthen its foothold in the digital marketing space. According to the company, the marketing cloud is a $10 billion+ opportunity. Well-positioned in a growing market, this business is expected to witness robust growth of close to 25% in Q1 2017. We currently project revenues from its digital marketing division to grow to over $500 million in Q1.

Document Cloud To Boost Acrobat Family Revenues

Adobe Acrobat family is the third largest segment at Adobe and makes up 15% of its value. In the past few years, revenues from this business have been on a decline, primarily due to the launch of Document Cloud services that have subscription fees spread over the period of usage. 2016 Document revenue was $764.8 million and Document Cloud revenue grew to $431.3 million – or 56% of Document revenues. The company reported that its Document Cloud subscriptions eclipsed licensing of perpetual Acrobat software on Adobe.com, and it expects to see stronger migration among enterprise customers in the coming year. We expect Document Services ARR to drive revenue growth in the Acrobat family division in Q1, and revenue for Document Cloud to exceed $125 million.

Smaller Divisions To Report Declines

Some of Adobe’s smaller businesses, including Adobe Packaged Software, LiveCyle software and Print & Publishing, contribute less than 3% of the company’s value according to our estimates. 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 businesses to decline in Q1 2017.

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