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Adobe Earnings Preview: Revenue Growth To Continue Due To Strong Adoption Of Cloud Services

Adobe ( NASDAQ:ADBE), makers of the Creative Cloud, is set to report its fiscal Q4 results on 15th ecember. (Fiscal years end with November.) While the company continues to ramp up its portfolio of services and products acquisition, the strong growth in its organic business continues to boost revenues and profitability. In Q3, Adobe's revenues were near the higher end of its guidance range as the Company continued to report growth in its Cloud revenues, with Creative Cloud ( CC ) and Marketing at the forefront. Trefis expects that this trend continued in Q4 with strong growth in both CC and the Marketing cloud. However, Trefis believes that revenues from the LiveCycle and Connect business declined, while that of the Print and Publishing business remained flat during the quarter.

Check out our complete analysis of Adobe

Outlook For Q4 And 2016

Adobe has guided for revenues of $1.55 billion to $1.60 billion for the fourth quarter of fiscal 2016. It indicated that GAAP EPS would be in the range of $0.60 to $0.66, and non-GAAP EPS between $0.83 and $0.89. It expects CC net new subscriptions and Digital Media ARR to grow for the year to $4 billion. Furthermore, Adobe expects revenues from its digital marketing cloud to grow by 20% for the year 2016 and bookings to increase by 30%. The revenue guidance for FY2016 is $5.80-$5.85 billion, while GAAP EPS and Non-GAAP EPS is expected to be $2.12-2.18 and $2.94-3.00, respectively.

Growth In Cloud Services To Continue

According to our estimates, the Creative Cloud ( CC ) division is the biggest of Adobe's operating segments and makes up 49% of its value. The CC division continues to witness strong growth in net subscriptions. Considering the addition of new users for CC in the last two-quarters, we expect the company to report $3.1 billion in average revenues run-rate ( ARR ) for this product family in 2016, which is approximately 50% higher than last year's level.

Adobe's clients continue to adopt CC as the company continues to add more products to its portfolio. Furthermore, it continues to add functionality for mobile devices, which is increasing the popularity of CC amongst creative designers. While Trefis expects the subscriber base to grow, for the subscriber base to grow to the projected 9.1 million, the company will have to report the addition of at least 600,000 subscribers for Q4. Additionally, we expect that the growth in licensing can come from enterprise term licensing agreements (ETLA), as has been the trend over the past few quarters. However, as the company is improving its portfolio of services by adding products at lower price points, we expect the company to report a minor decline in average revenue per user (ARPU) during the quarter. Nevertheless, we believe that CC will continue to drive revenue over the next couple of years.

Focus on Revenue Growth From New Marketing Cloud Products

Adobe's cloud marketing division is the second biggest division and makes up 28% of its value in our model. 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 both organic and inorganic means. In November, the company acquired TubeMogul, an ad tech company for buying and measuring video advertising company, for $540 million.

The marketing cloud business has had a compounded annual growth rate ( CAGR ) of 50% over last five years. This platform provides a cost-effective portfolio of digital marketing solutions for companies that can manage marketing campaigns across different channels and devices. Gartner consistently ranks its products among the best solutions for digital marketing and customer relationship management ( CRM ). Additionally, it continues to explore the digital marketing space and add functionality, the most recent one being the TubeMogul's programmatic ad platform. 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 marketing division.

We expect Adobe's marketing platform to continue to lead the digital marketing solutions market in the short term, on the back of new product releases, as it enjoys strong brand recognition. We also 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 in Q4 and FY2016. Additionally, we expect the company to report growth in revenues from new verticals, especially from Primetime, a multi-screen TV platform that enables the dynamic placement of ads on over the top (OTT) live video feeds in Q4.

We currently have a $104 price estimate for Adobe , which is inline with 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 Nasdaq, Inc.


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

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