A Model Shift Well Received by Adobe Customers

Digital software maker Adobe (Nasdaq:ADBE) is shifting from a license-based model to a subscription-based model for its services. But the transition isn’t so simple to dissect for market analysts. Adobe’s customers are migrating from a perpetual licensing model to cloud subscriptions. Financial reporting for the new business model requires Adobe to recognize revenues over time compared with recognizing them at the time of purchase.

Adobe’s Financials

Adobe saw Q3 revenues grow 7% over the year to $1.08 billion, missing the market’s projections of $1.11 billion. EPS of $0.58 was also short of the Street’s target of $0.59 for the quarter. Revenue growth was driven by the strong adoption of Adobe’s cloud suite and a 40% increase in digital marketing suite revenue.

By segment, Digital Media revenues grew 3.1% over the year to $769.1 million. Adobe reported an addition of more than 100,000 net new subscriptions, during the quarter, ending with 200,000 paid subscriptions for the Creative Cloud software suite. Digital Marketing revenues fell 18.5% year over year to $257.1 million.

During the quarter, Adobe bought back 2.4 million shares for $76.1 million.

For the current quarter, Adobe projected revenues of $1.075 billion-$1.125 billion, with an EPS of $0.53-$0.58. The Street was looking for revenues of $1.14 billion with EPS of $0.61.

Adobe’s Growing Product Line
As part of its continued digital strategy, Adobe added newer products. It recently announced the launch of Adobe Photoshop Elements 11 and AdobePremiere Elements 11, upgraded versions of its leading consumer photo- and video-editing software. Photoshop Elements 11 now offers editing, organizing, and sharing features, while Premiere Elements 11 helps users make home movies that look professional.

It also released the latest Adobe Digital Publishing Suite – Single Edition. The offering helps developers build mobile apps and simplifies the work for designers to create and deliver digital publications to the iPad through the Apple App Store without writing code. Members can create content such as marketing material, brochures, product guides, or personal design portfolios, and submit an unlimited number of apps to the Apple App Store for publication, at no additional cost. The service is based on Adobe’s Creative Cloud launched earlier this year. The membership-based cloud service lets designers download and install Adobe’s desktop applications and use online services for file storage, sharing, collaboration, and publishing.

Adobe’s stock is trading at $32.53 with a market capitalization of $16.06 billion. It touched a 52-week high of $34.78 in April of this year.