Adobe Earnings: Cloud Services Boost Revenues Across Divisions Yet Again

by Trefis Team
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Adobe (NASDAQ:ADBE) posted its fiscal Q3 results on Tuesday after market close, and its revenues increased by 26% to $1.84, once again above its guidance range. As a result, the stock price rose by close to 5% in after-market 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 $4.87 billion for its digital media business, which includes creative and document cloud products. The net ARR increase in Q3 was $308 million and was driven by continued strength in its Creative Cloud and Document Cloud businesses. Digital Cloud Marketing revenue also grew by 26% year over year. Its waning LiveCycle software revenues declined by 15% to $21.7 million, while the revenues for print and publishing business declined by 7% to $41.4 million. In this note, we examine some of Adobe’s key drivers and its outlook for fiscal Q4.

Outlook For Q4 2017

Adobe has guided for revenues of $1.95 billion for the fourth quarter of fiscal 2017. It expects that GAAP EPS to be around $0.86, and non-GAAP EPS to be around $1.15. The company expects to achieve approximately $330 million of net new Digital Media ARR. It expects digital media and digital marketing cloud revenues to grow by 25% and 17%, respectively.

Strong CC Subscriptions Boost Revenues In Q3

According to our estimates, the Creative Cloud division is the biggest of Adobe’s operating segments and contributes approximately 55% of its value. The company reported that it added a record number of new subscribers for CC during the quarter. The company also stated that it was witnessing a strong uptick in the video category with strong     adoption for its Creative Cloud video solutions. With the rise of Augmented Reality (AR) and Virtual Reality (VR), Adobe is deploying its resources to fill the gap in its video solutions portfolio. Recently, it acquired 360-degree and virtual reality software from Mettle to supplement Adobe Creative Cloud’s existing 360/VR cinematic production technology. We believe that this will bode well for the company in the future.

The growth in CC subscriptions continued, as licensing revenues from all three segments (i.e. individual, team and enterprise term licensing agreements (ETLA) grew. 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 $1.79 billion in Q3, which represents 59% of overall revenues. The company also reported that Creative Cloud ARPU grew quarter-over-quarter across all its product offerings in Q3.

Revenue For Marketing Platform Grows, Booking Disappoints

The Experience Cloud platform, which is encompasses Adobe Marketing Cloud, Adobe Analytics Cloud and Adobe Advertising Cloud, is the company’s second-biggest division and makes up 30% 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 the Marketing Cloud and analytics platform. In Q3, this division reported a 26% year-over-year increase in revenue to $508 million.

The company said that in the trailing four quarters, data transactions for its Marketing Cloud solutions exceeded 150 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, which has lowered the booking amount in the current quarter. Deferred revenue grew to a record $2.20 billion, up 9% 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

The Adobe Acrobat family is the third largest division for Adobe, and makes up around 10% of its value. In the past few quarters, revenues from this division have grown, primarily due to the adoption of Document Cloud services that have subscription fees spread over the period of usage. Q3 Document Cloud services revenue grew by 10% to $206 million and the Document Cloud ARR grew to $556 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 $141 price estimate for Adobe, which is marginally lower than the current market price.

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