Adobe (Nasdaq: ADBE) has been transforming its operations to stay in step with the industry’s trends. For the past few years, it has been shifting toward a subscription-based model from the traditional license-based model for its software. More recently, it has been making relevant acquisitions in the cloud. The recent results were stellar, but the earnings outlook failed to impress the market.

Adobe’s Financials
Adobe’s fourth quarter revenues grew 23% over the year to a record $2.46 billion, ahead of the market’s projections of $2.43 billion. This was the fifteenth consecutive quarter that Adobe delivered revenue growth. Adjusted EPS of $1.87 were marginally lower than the Street’s forecast of $1.88. Including the impact of the acquisitions of Magento and Marketo, earnings came in at $1.90 for the quarter.

By segment, revenues from the Digital Media segment grew 23% to $1.71 billion with Creative revenue growing 26% to $1.45 billion and Document Cloud growing 10% to $259 million. The digital experience segment reported a growth of 25% over the year to $690 million driven by a 30% growth in subscriptions-based revenues. The market was looking for revenues of $1.70 billion from the Digital Media segment and $660.2 million from the Digital Experience segment.

The acquisition of Marketo helped add $21 million in revenues for the quarter for Adobe. Magento’s acquisition brought in another $30 million. But while the acquisitions may be delivering higher than expected revenues, but the lower than expected earnings suggest that Adobe’s acquisitions may be impacting its earnings.

Adobe’s transition to the subscription model is helping it grow. During the quarter, Adobe added digital media annualized recurring revenue (ARR) of $430 million in the quarter, exiting the year with $6.83 billion. The growth reflects how Adobe has a growing customer-base for its subscription offerings. Adobe reported 88% of its revenue came from recurring sources, compared with 84% a year ago.

Adobe ended the year with $8.725 billion in revenues and an EPS of $5.50. Including the Magento and Marketo acquisitions that it made recently, the revenues for the year came in at $9.03 billion with an EPS of $6.76.

Adobe expects to end the current quarter with revenues of $2.54 billion with an adjusted EPS of $1.60. The market was looking for revenues of $2.52 billion with an EPS of $1.88. Adobe expects to end the current year with revenues of $11.15 billion and an adjusted EPS of $7.75. The Street had forecast revenues of $10.8 billion for the year with an adjusted EPS of $7.98.

Adobe’s Product Upgrades

Adobe has been able to deliver strong revenue growth due to its continuous product upgrades. Recently, it began shipping an all-new Acrobat DC which comes with connected mobile apps like Adobe Scan and Acrobat Reader Mobile to help users create, share and collaborate with PDFs across smartphones and tablets. It has also integrated its offerings with other platforms. For instance, Adobe Sign, its e-signature solution, has new integrations and partnerships with Dropbox, Microsoft Dynamics, and ServiceNow.

It also continues to invest in building the Adobe Experience Platform, the first open platform for customer experience management. The Adobe Experience Platform will aim to deliver a unified view of the customer for both CMOs and CIOs. As part of this initiative, it has entered into a partnership with Microsoft and SAP – the Open Data Initiative. This initiative is targeted at eliminating the data silos that are present across all organizations. Adobe plans to leverage this data to deliver customized, real-time customer experiences.

Adobe’s recent results reveal the impressive revenues being brought in by Marketo and Magento. I would like to know from the users why are they choosing Marketo over services offered by Oracle’s Eloqua or Salesforce’s Pardot that offer similar products? For instance, marketers are known to favor Eloqua’s decision map which is similar to a visual interpretation of a mind map. Also, Pardot offers better integration with Salesforce. Similarly, Magento has some big competition to deal with as well. For instance, Shopify comes with an easier visual interface, and BigCommerce hosts the users store for them. Why do you choose Magento instead?

The market was disappointed by Adobe’s earnings outlook and the stock fell 7% post result announcement. It is currently trading at $230.00 with a market capitalization of $112.27 billion. It touched a year high of $277.61 in September this year. It was trading at year low levels of $172.92 in December last year.

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