After A Strong First Half, Can Adobe Continue Its Growth Momentum?

by Trefis Team
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Adobe
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Adobe (NASDAQ:ADBE) announced its Q2 FY’18 results on Thursday, June 14, reporting a solid 24% increase in net revenue to $2.2 billion. Adobe has been a high-growth stock in the last few quarters since it announced Q3’17 earnings in mid-September. Adobe’s stock price has increased from $155 to $255 since October of last year – a 65% increase. The rally was driven by successive quarters of positive results as well as a robust outlook for FY’18. The trend is expected to continue through the end of the current year, particularly for Digital Experience offerings, according to Adobe’s management.

In the second quarter, Adobe reported a 30% y-o-y increase in subscription revenues to $1.9 billion – a trend consistent in recent quarters. Comparatively, product revenues were down 11% to $151 million and services revenues were up by a modest 4% to $121 million. Going forward, Adobe’s subscription-based revenues from the Digital Media segment are likely to continue to grow rapidly and drive top-line growth. Adobe’s management expects net revenues to increase 25% to $2.2 billion in the third quarter, keeping up the growth spree. We forecast full year revenues to increase almost 23-24% for the full year as well. We have summarized our expectations for the company’s FY’18 results on our interactive dashboard platform. You can change expected segment revenue and net margin figures for Adobe to gauge how changes will impact its value.

Digital Media segment includes revenues from Creative Cloud and Adobe Document Cloud. In recent years, Creative Cloud revenues have increased in high double digits, driven by increases in individual, team and enterprise subscriptions. This trend continued through FY’18 as well. In the second quarter, both Creative Cloud revenues and Document Cloud revenues were up 22-24% y-o-y to $1.3 billion and $243 million, respectively. We forecast Digital Media to remain the key growth driver for Adobe in the coming quarters, as standalone product sales are expected to remain low. It should be noted product sales form less than 10% of Adobe’s total revenues, due to which we expect a minimal impact on earnings from revenue declines in the products segment.

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