Adobe Earnings Will Be All About Creative Cloud and Cloud Services

NEW YORK (TheStreet) -- Adobe Systems (ADBE) will report second-quarter earnings results Tuesday after the closing bell. Once known for its popular Acrobat (PDF) document reader and Photoshop graphic software, the San Jose, CA.-based tech giant has tied its future on the success of the cloud -- particularly its Creative Cloud and Cloud Services, which are growing at rapid rates.

Adobe's cloud services has become the company's top priority. Not only does Adobe expect to end fiscal year 2015 with almost $3 billion annual recurring segment revenue, growing at a rate of 20% annually, the company is targeting some six million paid Creative Cloud subscriptions by the end of fiscal 2015. This is an aggressive goal, requiring Adobe to generate almost 50,000 paid subscribers per week for the entire fiscal year.

That's precisely what the company has done, including signing on 517,000 Creative Cloud subscribers in the first quarter -- an almost 30% increase year over year, bringing its total to almost 4 million. Adobe was projecting a sequential subscriber decline since the first quarter is typically one of its weakest quarters.

All told, Adobe's cloud ambitions has turned it into a diversified cloud marketing specialist, possession enhanced digital media and digital marketing capabilities. Investors have benefited from Adobe's transformation, which Adobe has achieved through a series of acquisitions and through a change in how its customers buy/access its software and services.

For instance, the days of boxed software are gone. Software subscriptions and license delivered via the cloud is now Adobe's new business model. The result has been a boon for the company and its shareholders.

Not only is ADBE stock trading at near all-time highs, but just in the past three years ADBE shares have gained 140% against gains of 40% and 55% for the Dow Jones Industrial Average (DJI) and the S&P 500 (SPX), respectively.

Moreover, with Adobe expecting revenue from its digital marketing cloud to grow this fiscal year by a 25%, culminating with full-year 2015 earnings projected to grow at over 60%, there's seems to be no weakness in its cloud business.

For the quarter that ended in May, the average analyst estimate calls for earnings of 45 cents per share on revenue of $1.16 billion, translating to year-over-year increases of 21% and 9%, respectively. For the full year, ending in November, earnings are expected to climb 61% above last year to $2.08 per share, while revenue of $4.89 billion marks of 18% year over year climb.

That quarterly earnings and full-year earnings are projected to grow at twice and three times the rate of quarter and full-year revenue speaks to the strength of the underlying business Adobe has created. While ADBE stock is not cheap today at 130 times earnings, the forward P/E is only 23, suggesting excellent value for a company that's projected to grow fiscal 2016 earnings at above 50%.

All told, buoyed by its Creative Cloud and Cloud Services, Adobe is operating on all cylinders. With the company in January announcing plans to buy back 5% of its shares through 2017, it would be a mistake to part with this winner, whose shares are not likely to get cheaper.

This article is commentary by an independent contributor. At the time of publication, the author held no shares in any of the stocks mentioned.

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