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Adobe’s Progress Remains Unhindered

July 09, 2014 | About:

In today’s economy, application software plays a pivotal role due to the growth of mobile as well as cloud software. Unlike the olden times when all the applications were confined to a few types of computers, presently the application of softwares has become more varied. Due to the development in technology, software can work and be accessed more efficiently through mobile, internet, and cloud functions. Adobe Systems (NASDAQ:ADBE) is the one which has created a revolution in this technology field.

This San Jose, Calif.-based company offers a line of software and services used by professionals, marketers, knowledge workers, application developers, enterprises and consumers for creating, managing, delivering, measuring and engaging with content and experiences across multiple operating systems, devices and media. Adobe has three business segments: Digital Media, Digital Marketing, and Print and Publishing. The company distributes its products through a network of distributors, value-added resellers (VARs), systems integrators, independent software vendors (ISVs), retailers, and original equipment manufacturers (OEMs).

Adobe is one of the largest software companies in the world. The firm's flagship offering in its digital media business is Adobe Creative Cloud, which allows customers to download the latest version of Adobe Creative Suite products (like Photoshop). The firm also continues to focus on digital marketing solutions.

Performance at a Glance

Adobe’s Document Services ARR grew from $143 million exiting the fourth quarter to $164 million exiting quarter one. Total Document Services subscriptions – spanning EchoSign, Create PDF Online and related services – grew to nearly 1.8 million.

The company’s cash flow from operations was $252 million, and deferred revenue grew by $52 million to a record $881 million.

Adobe CEO Shantanu Narayen explained that the unexpectedly strong sales came from rapid adoption of Adobe's new cloud-based software suites. The shift away from straight-up license purchases and into renewable contract subscriptions is also working out better than planned.

"We achieved a significant milestone with our transition to the cloud in our first quarter with more than half of Adobe's total revenue coming from recurring sources such as Creative Cloud subscriptions and Adobe Marketing Cloud adoption," said CFO Mark Garrett.

Further, this application software giant is targeting its Q2 share count to be 508 million to 510 million shares, net non-operating expense to be between $16 million and $18 million on both a GAAP and non-GAAP basis, and Q2 tax rate of 28% to 29% on a GAAP and 21% on a non-GAAP basis. These targets will yield a Q2 GAAP earnings per share range of 6 cents to 12 cents, and a Q2 non-GAAP earnings per share range of 26 cents to 32 cents.

On March 10, 2014, Department of Defense (DoD) has entered into a three-year Joint Enterprise Licensing Agreement with Adobe which will result in expanded access to Adobe software across branches and departments. The agreement provides the U.S. Army, U.S Air Force and Defense Information Systems Agency (DISA) the ability to standardize on Adobe Creative Cloud products, Adobe Acrobat, and capabilities of Adobe Experience Manager.

Adobe expects to have nearly 3 million paid CC individual and team subscriptions by the end of fiscal 2014. 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.

Revenues Boosted With Adoption of Strong Marketing Platform

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. Adobe continued to witness strong growth in its marketing cloud services and revenues grew by 23% year-over-year to $283 million. Additionally, the revenue run rate exceeded $1 billion in annual revenue. 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 devices. Adobe expects new bookings to grow at a 30% CAGR, and revenues to grow at a 20% CAGR by 2016. While this division contributed 20% to Adobe’s total revenues in 2013, it is expected to increase to 24% by 2020.

Photoshop Remains the Flagship Product for Adobe

Adobe is looking to expand its cloud-based product offerings so as to attract more customers to subscribe to its Digital Media suit of products. The Digital Media segment consists of the Creative Cloud and Document Services sub-segments, and Photoshop remains the flagship product of the Creative suite of products.

Adobe sells the Photoshop subscription separately at a price of $9.99 per month, which includes the mobile and desktop version, while the company sells the complete Creative cloud subscription at $49.99 per month to individuals and $69.99 per month to teams. Adobe expects that by separating the Photoshop subscription, it can target photographers and hobbyists, including the former Photoshop Elements and Photoshop Lightroom customers, and entice them to purchase its Photoshop cloud subscription.

Final Thoughts

Cloud technology has caught up with people's desire to stream events live on any device, and the Sochi Olympics will provide Adobe a ground to prove. By providing live streams to cable subscribers, NBC has given people a real reason to stay with cable instead of cutting the cord, and big sporting events may end up being cable's savior in a world where streaming services seem to be taking over.

Adobe’s Creative Cloud project is the main catalyst to deliver strong results. The company has an amazing pipeline of innovation that will deliver in the coming months, as well as plans to differentiate itself by further integrating its Cloud businesses. Adobe has attractive valuation and strong exposure to the growing trends in the industry. The company remains committed to its long-term targets, and therefore I am pretty bullish that this application software giant won’t let its valued customers as well as investors down on the long run.

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