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Will Adobe’s Creative Cloud Continue Its Growth in Fiscal 1Q16?

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Creative Cloud subscriptions enabled Adobe to exceed analyst expectations in the past nine quarters

Adobe’s (ADBE) growth in fiscal 4Q15 marked the ninth consecutive quarter that the company’s earnings topped market expectations. Adobe’s CC (Creative Cloud) subscriptions surpassed analysts’ expectations in fiscal 4Q15, showing that Adobe’s transition towards the subscription model is happening at a faster pace than expected.

Adobe said that approximately 52% of its customers are subscribed to the complete Creative Cloud bundle for approximately $50 per month while the remaining 48% subscribe to individual products within the CC portfolio.

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According to Mark Garett, CFO of Adobe, Photoshop Lightroom is the fastest growing app in Creative Cloud. In October 2015, Adobe made its Lightroom photo editing software free for Apple (AAPL) iOS and Google (GOOGL) Android. This move will likely take the company a long way in the mobile and smartphone space, which is currently dominated by Apple’s iOS and Google’s Android. It also explains why it has emerged as the fastest growing app.

Adobe’s Digital Media segment

Creative Cloud (or CC) is a subsegment of Adobe’s Digital Media segment. Adobe’s Creative Cloud is hosted on Amazon (AMZN) Web Services (or AWS).

Apart from CC, Adobe’s Digital Media includes Creative Suite, Developer Tools & Services, and Document Cloud. Adobe’s increased Creative Cloud subscriptions enabled the company’s Digital Media segment to grow by 35% to post $875 million in revenues in fiscal 4Q15. Digital Media contributed 65% toward the company’s overall revenues in fiscal 2015.

Adobe expects its digital media and total addressable market to grow to around $21 billion and $48 billion by 2018. As the above presentation shows, Creative Cloud is expected to become an $8.3 billion market, which will be over one-third of the $21 billion digital media market by 2018.

You might consider investing in the SPDR S&P 500 ETF (SPY) to gain exposure to Adobe. Adobe makes up 0.24% of SPY. Investors who would like application software exposure could also consider this ETF. Application software makes up ~7% of SPY.

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