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Creative Cloud Subscriptions Should Boost Adobe Digital Media

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Creative cloud subscriptions should boost Adobe’s Digital Media

In the previous part of this series, we discussed analysts’ expectations for the soon-to-be-announced Adobe (ADBE) fiscal 4Q15 and 2015 results. Let’s see how Adobe’s Digital Media segment is instrumental in the company’s improved performance. Adobe expects Digital Media to grow at a compound annual growth rate of 20% in fiscal 2015–2018 with a total addressable market of $21 billion. Adobe expected growth in Digital Media to pick up as customers continue to transition from perpetual licenses to a subscription model.

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Creative Cloud subscriptions, team and enterprise term licensing agreements (or ETLAs), and an increase in document services collectively contributed to Adobe’s Digital Media segment growth. Adobe expects Digital Media annualized recurring revenue to grow in fiscal 2015 to $2.95 billion. The company’s Creative Cloud (or CC) subscriptions grew to 5.3 million subscribers, an increase of 90% year-over-year in fiscal 3Q15. Adobe launched Creative Cloud in 2011, which is hosted on Amazon (AMZN) Web Services (or AWS).

Adobe’s strategy to enhance presence in the mobile space

In October 2015, Adobe made Lightroom, its photo editing software, free to use for Apple’s (AAPL) iOS and Google’s (GOOGL) Android. Now, Lightroom is accessible on phones or tablets without requiring a Creative Cloud login. Customers don’t need desktop software subscriptions to use Lightroom mobile. But if the customer intends to edit and sync files on desktop, then they have to pay for Creative Cloud.

This move should take the company a long way in the mobile and smartphone space, which is currently dominated by Apple’s iOS and Google’s Android.

Adobe expects a market worth $48 billion by 2018

In early October 2015, Adobe provided its future growth strategy and financial targets. Shantanu Narayen, Adobe’s president and CEO, stated, “We are targeting 20 percent revenue and 30 percent non-GAAP earnings CAGRs between FY15 and FY18 that reflect our business momentum and growing addressable markets.” Adobe expects its total addressable market to grow to around $48 billion by 2018.

Though Adobe makes up only 1.02% of the Technology Select Sector SPDR Fund (XLK), investors who would like application software exposure could invest in this ETF. Application software makes up ~31% of XLK.

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