Adobe Rises To Record Q4 Revenues On Creative Cloud

Adobe (NASDAQ:ADBE) beat its Q4 revenue guidance of $1.07-$1.12 billion and reported record Q4 revenue of $1.15 billion, taking its annual revenue to $4.4 billion. The company saw significant growth in its Creative Cloud and Marketing Cloud initiatives. According to the company, it has nearly 1 million free subscribers for the Creative Cloud, along with 326K paid subscribers and at an average selling price of $750 per subscription, this leads to an annual recurring revenue of $153 million.

Adobe Marketing Cloud’s Q4 revenues grew 32% on a yearly basis to $220.4 million. The only significant drop in revenue was reported in the LiveCycle and Connect business, which reported $70 million in Q4, down from $103 million last year. The company has seen a faster-than-expected adoption of subscription licenses and will focus on increasing its end-user subscriptions while rolling out enterprise term licenses in 2013.

The company reported a diluted earnings per share (EPS) of $0.44 on a GAAP-basis and $0.61 on a non-GAAP basis. Operating income and net income was $307.8 million and $222.3 million, respectively, on a GAAP basis, whereas cash flow from operations was $473.7 million. An indication of the popularity of Creative Cloud was that it added 10,000 new subscribers each week in Q4 2012, up from 8,000 last quarter. We examine some of Adobe’s key drivers below and its outlook for 2013. ^[1]

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Outlook for Q1 2013 and FY 2013

Adobe has guided for revenues of $0.95-$1 billion for Q1 2013 mainly on the effects of the Q4 to Q1 cycle. This would lead to Q1 GAAP EPS in the range of $0.08 to $0.14 and Q1 non-GAAP EPS of $0.26 to $0.32.

Adobe expects to have over 1.25 million paid Creative Cloud individual and team subscriptions by the end of 2013, and according to our calculations, it means it will need to add over 17.5K paid users per week for the rest of 2013, nearly double its current weekly subscription rate. This would give the company total annual recurring revenue of approximately $685 million. The company claims that 2013 will be the pivotal year in its transition to the subscription model, and we expect it to end the year with approximately $800 million of Digital Media annualized recurring revenue (ARR).

The company expects the LiveCycle and Connect business to continue to decline, contributing approximately $200 million of revenue in 2013, and the Print and Publishing business to be flat year-over-year. Adobe expects 2013 revenue of $4.1 billion and EPS of $0.62 on a GAAP basis and $1.40 on a non-GAAP basis.

Putting Subscription Model In Perspective

Growing the subscription business too quickly may become a problem for Adobe in the short term. This model assures a regular monthly revenue stream, but the licenses are sold at a higher price point and too many subscriptions replacing licenses sold may provide a rocky revenue stream in the short term.

Creative Software is the largest business for Adobe and we estimate that the average price per license sold is somewhere in the $850-$900 range, with the entire Adobe CS6 costing nearly $2,500. We expect the company to sell around 2.5-2.75 million licenses next year. Adobe also stated that it modeled an 80% retention rate and the average selling price (ASP) for Creative Cloud subscription is $750.

In a scenario where most users transition to a subscription model, it will potentially lose $250-$275 million annually next year. However, this is not entirely bad as over a two-year refresh period, it will have potentially made much more in subscription revenues as users will need to pay an annual subscription fee of $750 per year as opposed to $850-$900 for two years. This calculation is based on average prices and will materially differ based on the number of high-priced licenses sold versus the number of lower-priced software licenses sold.

A likely indication of the trend that Adobe’s high-end segment buyers are transitioning to subscription is that it is pushing for enterprise licenses in 2013 and that its guidance of $4.1 billion in revenues for 2013 is lower than its revenues in 2012, and we are likely to see this trend reverse very soon.

We currently have a $33 Trefis price estimate for Adobe, which stands just below its market price. Creative Software accounts for nearly 50% of its total value.

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1. Adobe SEC Filings, www.sec.gov, Dec 13, 2012 [↩]