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Adobe’s Success Story Continues with Its Fiscal 4Q16 Results

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Part 2
Adobe’s Success Story Continues with Its Fiscal 4Q16 Results PART 2 OF 7

How Digital Media Contributed to Adobe’s Fiscal 4Q16 Results

Creative Cloud adoption enabled Digital Media segment to grow 23%

Previously in this series, we saw that Adobe Systems (ADBE) beat analysts’ expectations with its fiscal 4Q16 earnings. In this part, we’ll take a look at the company’s Digital Media operating segment, which contributes the most toward the company’s overall revenues.

Creative Cloud (or CC), a subsegment of Adobe’s Digital Media segment, grew 33% and posted $886 million in revenues in fiscal 4Q16.

How Digital Media Contributed to Adobe’s Fiscal 4Q16 Results

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Adobe generates Creative Cloud revenue from offerings such as Photoshop and Illustrator. Photoshop is available on Apple’s (AAPL) iOS and Google’s (GOOG) (GOOGL) Android systems. Creative Cloud is also hosted on Amazon (AMZN) Web Services.

The consistent increase in the adoption of the cloud enabled Adobe to record better-than-expected growth in Creative Cloud subscriptions, which boosted the Digital Media segment’s revenue. 

This growth in CC enabled Digital Media to grow 23% and record ~$1.1 billion in revenues in 4Q16. For fiscal 2016, the Digital Media segment grew 27.3% to ~$3.9 billion.

Subscriptions drove Digital Media ARR to $4 billion in 2016

Adobe’s (ADBE) transition toward the subscription model has put the company’s annualized recurring revenue (or ARR) in the spotlight. ARR shows us how much revenue the company is making from subscriptions. Adobe’s continued adoption of Creative Cloud and Document Cloud enabled its Digital Media’s ARR to reach ~$4.0 billion in fiscal 4Q16.

In its December 15 earnings call, Adobe stated that it expects 25% growth in its Digital Media ARR growth. This translates to the addition of ~$1 billion of net new ARR, leading to ~$5 billion of Digital Media ARR in fiscal 2017. For fiscal 1Q17, Adobe expected “to add approximately $225 million of net new Digital Media ARR in Q1.”

You could consider investing in the PowerShares QQQ ETF (QQQ) to gain broad-based exposure to Adobe. The company accounts for 0.84% of QQQ. Investors seeking application software exposure could also consider this ETF. Application software accounts for ~24% of QQQ.

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