Adobe Earnings Preview: All Eyes On Creative Cloud

| About: Adobe Systems (ADBE)

Adobe (NASDAQ:ADBE) will report its Q4 FY 2012 earnings on Dec. 13. We examine a few key drivers that we think will drive its earnings going forward.

Adobe has restructured its business to a subscription-based model and has been targeting two high-growth businesses -- digital media and digital marketing. It released products such as Adobe Social with an eye on the booming cloud and social analytics market. Its subscription model on the cloud is becoming quite popular, and we expect growth through its Adobe Creative Cloud. In this earnings release, we will look primarily at how Adobe is doing in the digital media and marketing space.

The company has also released a one-stop shop for ad management and analytics by integrating Adobe AdLens with Adobe SiteCatalyst. Unlike most other ad campaign management tools, which focus on a particular platform, the Adobe AdLens is a unified ad management system, which allows users to manage digital marketing efforts across search, display, and social media.

The company also made a foray into the online video ad market with Adobe MediaWeaver, its ad-insertion service. This service is integrated with Project Primetime, a video technology platform that publishes and monetizes TV content across web-connected devices. It also introduced the Primetime Media Player, which allows TV content owners and distributors to reach audiences across web-devices. This ensures that content is immediately monetizable through ad insertion and analytics.

The company also recently announced the release of a new suite of tools for game development. It released Adobe Scout, Adobe Gaming SDK, and Flash C++ Compiler in a bid to promote flash games. This suite is available as part of the Creative Cloud subscription. Flash games already rule the PC world, but they are losing out on tablet and mobile phone market share. Therefore, by introducing these tools as part of the creative cloud, Adobe can provide a single platform to build games and will be easier to publish across formats. The casual gaming market is currently worth $5 billion to $6 billion and is poised to grow to nearly $9 billion by 2014, according to the Casual Games Association. This division is however not going to feature significantly in the current quarter.

Creative Cloud Growth Is Key

Adobe has guided that for Q4 2012 it expects revenue of $1.07 billion to $1.12 billion, and diluted EPS in the range of $0.34-$0.39 on a GAAP basis and $0.53-$0.58 on a non-GAAP basis.

Adobe has a majority market share in the creative software space thanks to the continued success of its Creative Suite line of products. The majority of its revenues are driven by Creative software products like Photoshop, which is why Creative Cloud is expected to be one of its most important releases to date.

The subscription-based model was made available on May 11, 2012, to users at $49.99 a month and will allow them access to the entire CS6 suite as well as exclusive online content. Considering that the entire package is currently available for $2,600, the subscription model will attract and encourage part-time and casual users. The subscription model can make it cheaper for users to access the software, but there is an added advantage for the providers as they can exercise better control over software maintenance and updates.

There is, however, a chance that revenues may suffer in the short term as users migrate to the cloud-based offering. The company expects to add nearly 125,000 members to the Creative Cloud subscription list this quarter, which will give it an additional annual revenue of $94 million.

We currently have a $34 Trefis price estimate for Adobe, which stands just above its market price. Creative Software accounts for nearly 50% of its total value.

Disclosure: No positions.