Adobe Earnings Preview: Cloud Services To Power Revenue Growth

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Adobe ( ADBE ) is set to announce its Q2 2014 earnings on June 17. In Q1, even as its cloud subscription services gained traction, its revenues and profits fell due to the shift in focus from a perpetual licensing model to subscription and service licensing. In this earnings announcement, we expect the growth trend in cloud adoption to continue, which will drive revenues for Creative cloud and Acrobat family divisions. Furthermore, we expect Adobe's marketing cloud division to report yet another quarter of growth, buoyed by adoption of its marketing platform. However, we expect the revenues from LiveCycle and Connect business to decline, and the Print and Publishing business to remain flat during the quarter.

Check out our complete analysis of Adobe

Outlook For Q2 FY14 And Beyond

Adobe has guided for revenues of $1.00 billion to $1.05 billion for the second quarter of fiscal 2014. It indicated GAAP EPS would be in the range of $0.06 to $0.12, and non-GAAP EPS between $0.26 and $0.32.

Adobe expects to have nearly 3 million paid CC individual and team subscriptions by the end of fiscal 2014. According to our calculations, this means it will need to add over 30,000 paid users per week in 2014, 40% more than the 2013 weekly subscription rate of 21,000. This would give the company total annual recurring revenue of approximately $1.6 billion from CC. The company has also disclosed that it expects to end the year with over $2.5 billion of digital media revenue at a growth rate of 20% year over year. Furthermore, Adobe expects revenues from its digital marketing cloud to grow by 20% year over year. However, it expects the LiveCycle and Connect business to decline further, while the print and publishing business is expected to remain flat in 2014.

Growth In Cloud Services To Continue

According to our estimates, the Creative Cloud division is the biggest of Adobe's operating segments and makes up approximately 55% of its value. While this segment generated only $480 million in revenues in 2013, we expect the company to report $1.17 billion in revenues for 2014, which roughly translates into annual recurring revenues of approximately $1.65 billion.

Over the past year, Adobe's cloud subscription service has witnessed robust growth as clients have increasingly adopted these services to drive collaborative development efforts across their companies. While we expect that the share of revenue from Creative Cloud (CC) will continue to grow in Q2 2014, its adoption will continue to negatively impact the revenues and profitability as use of subscription service is generally spread over the period of the software's use.  In Q1, the company added 405,000 new subscribers, and 96% of the creative cloud subscribers have signed up for annual contracts. Additionally, the growth in licensing came from enterprise term licensing agreements (ETLA), which usually have tenure of three years. We expect this trend to continue in Q2 and estimate that the company is well underway to add 3 million subscribers in 2014. Therefore, we believe that the company will continue to report traction for its cloud services in this earnings announcement.

Revenues From Marketing Cloud To Grow

Adobe's cloud marketing division is the second biggest division and makes up 21% of its value. Over the past few years, Adobe has built a comprehensive digital marketing platform that addresses most of the needs in digital marketing. The company has scaled up the functionality and product offering of its marketing platform through organic and inorganic growth. We believe that this platform provides a cost effective digital marketing solution for companies that can manage marketing campaigns across different channels and devices.

Adobe is aiming to increase its revenues from cloud based marketing solutions by expanding in new geographies and verticals. We expect that, as Adobe continues to develop its marketing solutions capabilities, this division will emerge as an important driver for revenue growth. In this earnings announcement, we expect the company to report growth in revenues from new geographies. Additionally, since many of Adobe's digital marketing solutions cater to the growing big data analytics, mobility and social media industries, we expect the company to post incremental revenues across these industries. Adobe expects new bookings to grow at a 30% CAGR, and revenues to grow at a 20% CAGR by 2016. However, we project revenues from its digital marketing division to reach $3 billion by 2020.

To read more about our view on Adobe's digital marketing division, see here .

Acrobat Family Division Revenues In Focus

Adobe Acrobat family is the third largest division at Adobe and makes up 11% of its value. In the past few quarters, revenues from this division have been on a decline, primarily due to launch of document cloud services that have subscription fees spread over the period of usage. The company has amassed over 1.6 million subscribers for document cloud service. We expect this trend to continue in Q2, and forecast the subscriber base to grow to 2.2 million in 2014. Additionally, we continue to closely monitor the growth in Enterprise Term Licensing Agreements (ETLAs), adoption of online document services, EchoSign (an electronic content management system) as these have been instrumental in bringing new business to this division.

We currently have a $51 price estimate for Adobe , which is around 22% below the current market price.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: ADBE , IBM , ACN , MSFT

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