Adobe’s Subscription Move

According to Gartner’s Forecast Overview: Public Cloud Services, Worldwide, 2011-2016, 4Q12 Update worldwide spending on public cloud services is estimated to have grown 19% last year to $110.3 billion. The market is projected to grow 18% annually over the period 2011 through 2016 to be worth $76.9 billion by the year 2016. Within the market, SaaS segment is expected to grow 20% annually from $13.5 billion in 2011 to $32.8 billion in 2016.

Adobe’s Financials

But despite the projected increase in spending, Adobe’s (Nasdaq:ADBE) Q1 revenues fell 13% over the quarter and 4% over the year to $1.008 billion. Revenues were still ahead of the Street’s target of $985.7 million. EPS of $0.35 was also ahead of market’s projected earnings of $0.31 but fell 39% over the year.

By segment, revenues from Digital Media Solutions fell 18% over the quarter to $688 million. Adobe’s move to a subscription-based model continued as they added more than 153,000 net new paid subscriptions for the Creative Cloud segment. The increasing growth of mobile devices helped drive growth in Digital Marketing segment revenues, which increased 20% over the year to $215.0 million.

For the current quarter, Adobe projects revenues of $0.96 billion-$1.03 billion with EPS of $0.29-$0.35. The Street was looking for earnings of $0.24 for the quarter. Adobe expects to end the year with EPS of $1.45, surpassing market estimates of $1.41.

Adobe’s Mobile & Cloud Focus
Adobe is seeing significant traction in mobile device usage. Within the digital marketing segment, mobile transactions amounted to 25% of total transactions for the quarter, compared with 22% a quarter ago. To continue this growth, Adobe recently announced plans to acquire Thumb Labs, a mobile app developer. Thumb Labs was founded three years ago and has made mobile apps for other organizations that are online platforms that help people look for and find creative work.

As part of their product expansion within the segment, they recently launched Primetime, a product aimed at providing cable companies and broadcasters the ability to distribute TV content to Internet-connected devices. Adobe launched the service with Comcast and NBC Sports. Through their apps, these companies are able to provide their content on iOS- and Android-based devices.

Adobe is also expanding their presence in the cloud by moving away from the permanent software license model to a subscription model. Earlier this month, Adobe announced that all upgrades for their key products will now be available through a subscription model. Enterprises will now have to buy annual subscriptions licenses for their products, including the popular Creative Cloud Suite and other products such as Photoshop, Illustrator, and InDesign. For the consumer side, the move will impact products such as Acrobat, Lightroom, Photoshop Elements, and Premiere Elements.

Adobe believes the move will help them both speed up their migration to the cloud and speed up delivery of software upgrades to clients. Analysts believe that most technology professionals realize that the packaged software products are coming to an end. Microsoft has been migrating to a subscription model for their Office suite and Adobe’s move should not be a surprise to IT professionals. For those resisting the move, Adobe will continue to sell the packaged goods, but it will no longer release upgrades to those versions.

Adobe’s stock is trading at $42.91 with a market capitalization of $21.54 billion. It touched a year high of $47.17 earlier this month.