) posted its Q3 earnings on September 17, and the market reacted
positively to the results as the stock traded 5% higher in after
market hours. The company witnessed a faster-than-expected adoption
of subscription licenses for its Creative Cloud (CC) business as
some of its clients chose enterprise term licenses (ETLA) instead
of team offering during the period. The company now has over 1
million paid subscribers for the CC services that generated $546
million annualized recurring revenue (
) in Q3. Adobe also saw significant growth in its marketing cloud
initiatives. In Q3, digital marketing revenues grew by 20% y-o-y to
$311 million. However, its LiveCycle software and document services
business declined by 11% and 2% respectively.
The company reported diluted earnings per share (
) of $0.16 on a GAAP-basis and $0.32 on a non-GAAP basis. While the
company reported 8% y-o-y decline in revenues to $995.1 million,
its net income declined by 60% y-o-y to $83 million. Due to a
change in its licensing model from perpetual to subscription based,
Adobe reported unearned revenue growth to $683.1 million. We
examine some of Adobe's key drivers below and its outlook for
Check out our complete analysis of Adobe
Outlook For Q4 2013 And FY 2013
Adobe has guided for revenues of $1-$1.05 billion for Q4 2013.
This would lead to Q4 GAAP EPS in the range of $0.09 to $0.15, and
Q3 non-GAAP EPS of $0.28 to $0.34.
Adobe expects to have over 1.35 million paid Creative Cloud
individual and team subscriptions by the end of 2013. According to
our calculations, it means it will need to add over 27,000 paid
users per week for the rest of FY2013, 10% more than its current
weekly subscription rate of 24,000. This would give the company
total annual recurring revenue of approximately $685 million.
Additionally, we expect the company to end the year with over $875
million of Digital Media ARR at a revenue growth rate of 25% y-o-y,
and we expect that its document services ARR will increase to $115
million by the end of 2013.
The company also expects the LiveCycle and Connect business to
decline further while the Print and Publishing business is expected
to remain flat this year. LiveCycle and Connect business will
contribute approximately $200 million to revenues in
2013. Adobe expects 2013 revenue of $4.05 billion and EPS of
$0.56 on a GAAP basis and $1.34 on a non-GAAP basis.
Creative Cloud Subscriptions Gain Traction
According to our estimates, the Photoshop and Creative Software
division is the biggest of Adobe's operating segments and make up
approximately 55% of the company's value. During Q3 2013, this
segment generated approximately $637 million in revenues. Recently
Adobe abandoned its Creative Suite (
) entirely to focus its efforts on developing Creative Cloud. The
company has stated that the revenues from its perpetual licensing
software will decrease by 2015. However, it will continue to sell
CS6 to ease the transition to CC.
While we expect that the share of revenue from CC will continue
to grow in Q4, the adoption of CC will lower the revenues and
profitability as subscription services spread these over the period
of the software's use. With a license based model, Adobe received
bursts of income every two-three years when new software was
released. However, with the subscription fee structure, Adobe will
have recurring stable revenue over the period of the software's
use. During the past quarter, Adobe reported an increase in
adoption of enterprise CC offering through ETLAs and subscriptions.
Creative Cloud added 331,000 new subscribers in Q3 2013, up from
221,000 last quarter. As a result, the revenue from CC
increased by over 50% sequentially to $546 million, and subscriber
base grew to 1.031 million.
Revenues Continue To Shrink At Acrobat Family
Adobe Acrobat family is the second largest division at Adobe and
makes up 11% of its value. Acrobat family division reported 2%
y-o-y decline in revenues to $182 million. The primary reason for
this decline was lower sales of point product document services.
However, increase in revenue from Acrobat cloud services stemmed
further decline in revenues.
During the quarter, company's online document services surpassed
1.3 million subscriptions. Revenues from Acrobat Cloud services
grew 30% sequentially to $109 million, primarily due to increase in
ETLAs. While we expect document services' ARR will drive revenue
growth in the Acrobat family division, the company plans to have
perpetual model for Document Services for a longer period. This
might negatively impact the revenue growth in the future.
Adoption Of Digital Platform Lifts Digital Marketing
Omniture is Adobe's third largest division and makes up 10% of
its value by our estimates. Adobe acquired Omniture in 2009 and
since then has included all of Omniture's products under its
digital marketing cloud division. Recently, Adobe acquired Neolane,
which extended Adobe's capabilities into offline campaign
management. During the quarter, Adobe witnessed strong growth in
its marketing cloud services. Many research firms such as Gartner
and Forrester rank Adobe's web content management platform amongst
the top echelons of digital marketing platform.
In Q3, this division reported a 20% y-o-y increase in revenue to
$311 million, and the revenue run rate exceeded $1 billion in
annual revenue. Additionally, Adobe marketing
cloud achieved 28% y-o-y growth in revenues to $255 million in
the quarter. We expect that as big data analytics, mobility, social
media and cloud computing gain more traction across industries,
this division will report incremental growth in revenues as it has
a portfolio of analytical tools that deal with marketing on social
media and mobile. While this division contributed 12.5% to Adobe's
total revenues in 2012, we expect it to increase to 16% by the end
of our forecast period.
We are in the process of updating our Adobe model. At present,
we have a
Trefis price estimate for Adobe
, which is 20% below its market price.
a Company's Products Impact its Stock Price at Trefis