Adobe Earnings: Strong Adoption Of Cloud Services Boosts Revenues

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Adobe (NASDAQ:ADBE) posted its fiscal Q1 results on Thursday, March 16. Adobe reported that its revenues grew by over 21% to $1.68, 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 37.4% in the quarter.

Adobe’s annualized recurring revenue (ARR) reached nearly $4.25 billion for its digital media business, which includes creative and document cloud products. Digital Cloud Marketing revenue also grew by 23.4% year over year, with marketing cloud ARR reporting 26.5% growth. Its waning LiveCycle software revenues declined by 17.7% to $23.8 million, while the print and publishing business (relatively small) declined by 6.6%. In this note, we examine some of Adobe’s key drivers and its outlook for fiscal Q2. [1]

Check out our complete analysis of Adobe

Outlook For Q2 2017

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Adobe has guided for revenues of $1.73 billion for the second quarter of fiscal 2017. It expects that GAAP EPS to be around $0.66, and non-GAAP EPS to be around $0.94. The Company expects to achieve approximately $290 million of net new Digital Media ARR. It expects digital media and digital marketing cloud revenues to grow by 24% and 26%, respectively.

Strong CC Subscriptions Boost Revenues

According to our estimates, the Creative Cloud division is the biggest of Adobe’s operating segments and contributes approximately 50% of its value. While the company reported that it added net new subscribers for its CC during the quarter, it 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. Growth was also fueled by strong performance in the SMB segment and international growth. Furthermore, a continued migration of the Creative Suite installed base bolstered subscription numbers. As a result, Adobe achieved record Creative revenue of $940 million in Q1, which represents 38% year-over-year growth. The company also reported that Creative Cloud ARPU grew quarter-over-quarter (or was at least steady) across all offerings in Q1.

Continued Adoption of Marketing Platform, Especially Across Mobile Devices

Adobe’s Marketing Cloud division is the company’s 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 of digital marketers. The company has scaled up the functionality and product offering of its marketing platform, through organic and inorganic growth. In Q1, this division reported a 23% year-over-year increase in revenue to $501 million, primarily due to the assimilation of TubeMogul, which added $32 million to the top line.

The company stated that mobile remains a key driver for its Marketing Cloud business. Mobile data transactions grew to 56% of total Adobe Analytics transactions in the quarter and total data transactions in Q1 grew to 41.3 trillion. The company said that in the trailing four quarters, data transactions for its Marketing Cloud solutions exceeded 100 trillion. 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 the 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.

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. Q1 document cloud services revenue was $196 million and the Document Cloud ARR grew to $493 million in the quarter. We expect Document Services’ ARR to drive revenue growth in the Acrobat family division in the future as it continues to add new functionality in Adobe Sign.

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Notes:
  1. Adobe SEC Filings, www.sec.gov, March 16 2017 []