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Why Adobe expects its Q3 revenues to be the low point of 2014

Puneet Sikka

Adobe sees robust earnings backed by cloud subscriptions growth (Part 2 of 5)

(Continued from Part 1)

The high demand for CS6 also contributed to better-than-expected Q2 results

In the previous part of this series, we discussed how Adobe’s (ADBE) Q2 2014 earnings beat all estimates with regards to revenues and EPS (earnings per share), due to better-than-expected Creative cloud subscriptions. However, one thing to note here is that Q2 was the last quarter Adobe offered perpetual licensing of CS6, so as to focus completely on providing cloud-based products to its customers. Adobe plans to completely phase out the CS6 offering from the next quarter, which meant there was unusually high demand from Adobe customers who wanted to buy new perpetual licenses for CS6. This was one reason Adobe earned saw better-than-expected revenue results in Q2 and now expects Q3 revenues to be a low point.

Adobe expects Q3 to be a low point in terms of revenues

Beginning Q3 2014, Adobe will be solely focused on providing Creative cloud-based solutions to its customers. As a result, it expects its revenues for Q3 to be between $975 million and $1.025 billion—a mid-point of $1 billion, which is a bit low, considering Adobe earned $1.07 billion in revenues in Q2, as the chart above shows. Adobe expects that its perpetual licensing CS6 customers will eventually migrate to its Creative cloud offerings in the long term, which should increase its long-term revenues. However, for Q3, Adobe expected its revenues to be subdued.

Adobe completely shifts its focus on cloud products

The cloud services market is one of the fastest-growing in the industry. According to IDC, the market will increase from $47.4 billion in 2013 to $107 billion by 2014, at a compounded average growth rate of 23.5%—five times that of the overall IT industry. By phasing out the perpetual licensing offering of CS6, Adobe wants to concentrate entirely on its cloud offerings. Shifting its cloud offering is a necessary step for Adobe, as the whole enterprise software industry is shifting its focus towards cloud. Salesforce.com (CRM) is a pure player in cloud computing market, while companies such as Google (GOOGL), SAP (SAP), and Microsoft (MSFT) have increased their cloud offerings of late.

Continue to Part 3

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