Adobe Earnings Preview: Growth In Cloud Services To Boost Revenues

Adobe (NASDAQ:ADBE) is set to announce its Q2 results on June 20. In Q1, the company reported 21% growth in revenues to $1.68 billion, which was above its guidance range. Even though the company continues to witness improvement in performance metrics across two of its major business lines (Creative Cloud and Marketing Cloud), its legacy business continues to struggle as the shift to cloud services takes center stage. We expect that this trend continued in Q2 2017, and will likely persist through the remainder of the year. Below we detail what to expect from the company’s earnings release.

We have a $132 price estimate for Adobe, which is slightly below the current market price.

Adobe’s Guidance For 2017 & Q2

For Q2, the company expects to post $1.73 billion in revenues, while GAAP EPS and Non-GAAP EPS are expected to be $0.66 and $0.94, respectively. The company expects to achieve approximately $290 million of net new Digital Media ARR (annualized recurring revenue). Furthermore, it expects Digital Media segment year-over-year revenue growth of approximately 24%, and Adobe Marketing Cloud year-over-year revenue growth of approximately 26%.

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 to grow by 20% and 25%, respectively. Furthermore, Adobe expects revenues from its digital marketing cloud to grow by over 25% for 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 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 52% of its value. The CC division continues to witness strong growth in net subscriptions. In Q1, the Creative Cloud contributed nearly 56% to Adobe’s revenue. 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 Q2 2017, we expect Adobe to report over $950 million in revenues for the CC division even as the ARR for this product family witnesses growth above the guidance range.

Despite the increase in revenues, we expect a marginal decrease in average revenue per user (ARPU) during the quarter as Adobe continues to improve its portfolio of services by adding products at lower price points. Nevertheless, we believe that CC will continue to drive revenue over the next couple of years with the increase in the number of subscribers.

Marketing Cloud Revenue To Grow

Adobe’s Marketing Cloud division is the second biggest division and makes up over 28% of its value, according to Trefis estimates. 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 $477 million in Q1 2017.

Having been built largely through acquisitions, the business has had a compound annual growth rate (CAGR) of 5.5% over the last two years. Adobe is aiming to increase its revenues from cloud-based marketing solutions by expanding into new geographies and verticals. While much of the growth in revenues has stemmed from inorganic expansion, we believe that the next phase of revenue growth will stem from the expansion of its portfolio of services, which now has been supplemented by its Machine Learning and Artificial Intelligence (AI) platform Sensei. We currently project revenues from its digital marketing division to grow to $490 million in Q2.

Document Cloud To Boost Acrobat Family Revenues

The Adobe Acrobat family is Adobe’s third largest segment and we estimate that it makes up around 14% 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. Furthermore, the company continues to report that its Document Cloud subscriptions eclipsed license sales of the perpetual Acrobat software on Adobe.com, and it expects to see stronger migration among enterprise customers in the remainder of the year. With the increase in Document Cloud revenue, which now accounts for over 63% of total document revenues, we expect that revenue for Acrobat family will improve in Q2 as revenue for Document Cloud grows to $130 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 Q2 2017 and for the remainder of fiscal 2017.

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