Adobe Stock Hits Record Highs Driven By Creative Cloud, Marketing Cloud

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Adobe (NASDAQ:ADBE) posted its fiscal Q2 results on Tuesday after market close, and its revenues increased by 27% to $1.77, above its guidance range. As a result, the stock price rose by close to 5% in after-market hours trading. The company continued to report growth in its cloud revenues with Creative Cloud (CC), registering 35% growth in revenues during the quarter. Furthermore, Adobe’s annualized recurring revenue (ARR) reached nearly $4.56 billion for its digital media business, which includes creative and document cloud products. The net ARR increase in Q2 was $312 million and was driven by continued strength in its Creative Cloud and Document Cloud businesses. Digital Cloud Marketing revenue also grew by 29% year over year. Its waning LiveCycle software revenues declined by 21% to $21.3 million, while the revenues for print and publishing business (relatively small) were flat. In this note, we examine some of Adobe’s key drivers and its outlook for fiscal Q3.

Outlook For Q3 2017

Adobe has guided for revenues of $1.815 billion for the third quarter of fiscal 2017. It expects that GAAP EPS to be around $0.72, and non-GAAP EPS to be around $1. The company expects to achieve approximately $300 million of net new Digital Media ARR. It expects digital media and digital marketing cloud revenues to grow by 26% and 25%, respectively.

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Strong CC Subscriptions Boost Revenues In Q2

According to our estimates, the Creative Cloud division is the biggest of Adobe’s operating segments and contributes approximately 52% of its value. While the company reported that it added a record number of 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 $1.01 billion in Q2, which represents 34% year-over-year growth. The company also reported that Creative Cloud ARPU grew quarter-over-quarter across all its product offerings in Q2.

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. The company has scaled up the functionality and product offering of its marketing platform, through organic and inorganic growth. While the company continues to integrate TubeMogul into its Marketing Cloud offering, it is adding Artificial Intelligence and Machine Learning functionality of its Sensei platform to marketing cloud. In Q2, this division reported a 29% year-over-year increase in revenue to $495 million.

The company stated that mobile remains a key driver for its Marketing Cloud business. Mobile data transactions grew to 57% of total Adobe Analytics transactions in the quarter and total data transactions in Q2 grew by 35 trillion. The company said that in the trailing four quarters, data transactions for its Marketing Cloud solutions exceeded 135 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 its cloud divisions. Deferred revenue grew to a record $2.07 billion, up 23% year-over-year. As such, this division will likely report incremental growth in revenues going forward.

Document Cloud Services Buoys Revenues At Acrobat Family Division

Adobe Acrobat family is the third largest division at Adobe and makes up 14% 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 fees spread over the period of usage. Q2 document cloud services revenue grew marginally to $200 million and the Document Cloud ARR grew to $520 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.

We are in the process of updating our Adobe Model. At present, we have a $132 price estimate for Adobe, which is in line with the current market price.

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