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Adobe Should See Strong Cloud Adoption in 2Q16

Author: Lindsey Yonish, Published: June 18, 2016 at 4:15pm, Category: Earnings Preview

​One of the key takeaways from Adobe’s (NASDAQ:ADBE) 1Q16 earnings release was the outperformance of its Digital Media segment, due to better-than-expected recurring revenue growth, which achieved a record $932M. Investors should expect a strong showing in the company's 2Q16 earnings as well, with net new recurring revenues set to add about $275M in top-line QoQ growth to total Digital Media revenue for the quarter. The Digital Media segment is comprised of Adobe’s Creative Cloud and Document Cloud product offerings, which provide users with tools to create and publish content. The aforementioned growth in this area is due to migration of current users from Adobe’s standalone products to the all-inclusive Creative Cloud platform, serving new consumer segments, and offering new services and capabilities.

In the 1Q16 earnings release on 3/17/2016, management's guidance for the second quarter included the following:
  • Total revenue of $1.365B to $1.415B
  • GAAP EPS of $0.42 to $0.48 (non-GAAP EPS of $0.64 to $0.70)
  • Share count of 506M to 508M shares
  • GAAP tax rate of 23% (non-GAAP tax rate of 21%)

Below are some other things to watch for in the 2Q16 earnings release:
  • Fluctuating growth in Digital Marketing segment (from 20% in 1Q16 to ~17% in 2Q16) due to the transitioning from a perpetual to pay-as-you-go payment model.
  • Normalization in QoQ revenue growth (up to 2% QoQ from 5% in 1Q16) due to 2Q16 being one week shorter than 1Q16, which management estimates provided an additional $75M in total revenue for the quarter.

Our Adobe model derives total revenue by considering revenue growth rate and gross margin for each of Adobe’s three main segments: Digital Media, Digital Marketing, and Print & Publishing. Thus, the model is sensitive to any incremental changes in these areas, which could result in a large difference in share valuation (click here to download our ADBE Model). Changes in Digital Media assumptions in particular have the most impact, given that it is the largest of the three segments. With this in mind, some of the key assumptions that align the model with consensus estimates and management guidance are as follows:
  • Total revenue: Consensus calls for around $1.4B in total revenue 2Q16, which is towards the higher-end of management’s given range of $1.365B to $1.415B. This trend of modest growth holds in 3Q16, but to fulfill management’s estimate of strong YoY revenue growth, total revenue picks up in 4Q16 to put total year-end revenue slightly above consensus but still within range of management’s guidance.
  • EPS: Consensus calls for non-GAAP EPS of $0.68 in 2Q16, which is in the higher-end of management’s given range of $0.64 to $0.70. Our model assumes that share repurchase amounts and average price remain constant throughout the year, resulting in year-end EPS of $2.74, which aligns with consensus and is close to management’s call for ~$2.70.
  • Digital Marketing revenue growth: In the 1Q16 earnings call, management noted that Digital Marketing revenue growth – particularly that of its Marketing Cloud suite of products – would fluctuate above and below 20% YoY. In 2Q16, growth is forecasted to be sub-20%, and is set at 17% in our model. Though QoQ growth varies, the annual figure stands at 20% as given by management.
Source: Management’s guidance from the 1Q16 earnings call.

The author of this article has no financial investment or other conflict of interest related to the subject company or other companies discussed. Any views made or implied in this article represent the author’s opinions. Click here to Visit Lindsey's contributor page.

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