Adobe Earnings Preview: Cloud Services To Continue To Drive Revenue Growth

by Trefis Team
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Adobe (NASDAQ:ADBE) is set to announce its Q3 results on Tuesday, September 19. In Q2, the company reported 27% growth in revenues to $1.77 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 Q3 2017, and will likely persist through the remainder of the year. Below we detail what to expect from Adobe’s earnings release.

We have a $141 price estimate for Adobe, which is slightly below the current market price.

Outlook For Q3 2017

Adobe has guided for revenues of $1.815 billion for the third quarter of fiscal 2017. It expects 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, and guided for digital media and digital marketing cloud revenues growth of 26% and 25%, respectively.

Growth In Creative Cloud To Continue

According to our estimates, the Creative Cloud (CC) division is the biggest of Adobe’s operating segments and makes up 55% of its value. In the previous quarter, the company reported a record addition to its Creative Cloud software as revenue growth for this vertical continued. In Q3 2017, we expect Adobe to report over $1075 million in revenues for the CC division even as the ARR (annual revenue run rate) for this product family outperforms 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 revenues over the next couple of years with solid growth in subscribers.

Marketing Cloud Expected To Report Double-Digit Growth

Adobe’s Marketing Cloud division is the second biggest division and makes up 30% of its value, according to Trefis estimates. The company continues to report growth for this vertical due to both organic and inorganic expansion of its products and services. Specifically, Adobe is focusing on the mobile domain to strengthen its cloud marketing services. The company is also driving larger, multi-year and multi-solution customer contracts. We expect this trend continued in Q3, as the company continued to implement its strategy for a mobile-centric solution in marketing. Furthermore, we believe that the next phase of revenue growth will stem from the expansion of its portfolio of services to incorporate Machine Learning and Artificial Intelligence (AI) platform Sensei. We currently project revenues from its digital marketing division to grow to $515 million in Q3.

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 10% of its value. In the previous quarters, the company reported 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 Q3 as revenue for Document Cloud grows to $137 million.

Smaller Divisions To Report Declines

Some of Adobe’s smaller businesses, including Adobe Packaged Software, LiveCyle software and Print & Publishing, contribute less than 2% 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 Q3 2017 and for the remainder of fiscal 2017.

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