Adobe’s Revenues Set To Grow In Q4

Adobe (NASDAQ:ADBE) is set to announce its Q4 results on Thursday, December 14. In Q3, the company reported 26% growth in revenues to $1.84 billion, which was above its guidance range. While 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 Q4 2017, and will likely continue in 2018. Below we detail what to expect from Adobe’s earnings release.

We have a $145 price estimate for Adobe, which is around 15% below the current market price.

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.

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 54% 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. 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. In Q4 2017, we expect Adobe to report over $1144 million in revenues for the CC division even as the ARR (annual revenue run rate) for this product family outperforms the guidance range. Additionally, we expect improvement in average revenue per user (ARPU) during the quarter as Adobe continues to improve its portfolio of services by adding new products under CC.

Marketing Cloud Expected To Report Double-Digit Growth

The company continues to report growth for Experience cloud, which encompasses all marketing cloud services, 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 that this trend continued in Q4, 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 nearly $520 million in Q4.

Document Cloud To Boost Acrobat Family Revenues

In the previous quarters, the company reported that its Document Cloud subscriptions eclipsed license sales of the perpetual Acrobat software on Adobe.com. 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 Q4 as revenue for Document Cloud grows to $145 million.

Smaller Divisions To Report Declines

Some of Adobe’s smaller businesses, including Adobe Packaged Software, LiveCycle 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 LiveCycle & Connect Pro revenues. We expect revenues from these businesses to decline in Q4.

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