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Adobe’s Subscription Service Delivers

Posted on Friday, Mar 21st 2014

If analysts had any doubts about Adobe’s (Nasdaq: ADBE) capabilities of delivering on the cloud, they have been put to rest. In the recently reported results, Adobe has demonstrated how to successfully migrate from a software sales model to a cloud-based subscription service model.

Adobe’s Financials
Adobe’s first quarter revenues fell 4% over the year to $1 billion, ahead of the market’s projections of $0.97 billion. EPS of $0.16 was significantly ahead of the Street’s estimated $0.04 per share.

Adobe’s revenue from products fell 30% over the year to contribute to 47.1% of the quarter’s revenues. Subscription revenues grew 89% to bring in 42.4% while Services & Support fell 2.5% over the year.

By segment, Digital Media Systems grew 1.6% over the quarter to $641 million as the Creative Cloud subscriptions continued to grow. The Digital Marketing segment brought in 31.3% of the quarter’s revenues as their Digital Marketing Suite saw revenues climb 24% over the year to $267 million. Mobile transactions were a big driver in the segment and grew to 36% from 33% a quarter ago. Adobe’s Print and Publishing revenues came in at $45 million for the quarter.

For the current quarter, Adobe expects to earn revenues of $1.00 billion-$1.05 billion with an EPS of $0.26-$0.32. The market was looking for revenues of $0.99 billion and EPS of $0.25. Adobe expects to end the year with revenues of $4.06 billion and EPS of $1.10. The Street was modeling revenues of $4.07 billion and EPS of $1.12.

Adobe’s Subscription Services Grow
Adobe’s initial move to switch to a subscription-based model had irked their customers. But it appears that the shift has now been accepted. Adobe plans to continue to push their customers to a subscription-based model by releasing product upgrades only for these cloud-based services. Their Creative Suite products were last updated in 2012 and since then, they have been deploying all upgrade related efforts on the Creative Cloud offering instead. In the recently ended quarter, Adobe added 405,000 subscribers to their Creative Cloud, ending the quarter with 1.8 million paid subscriptions. In addition to that, nearly 96% of their subscribers are on annual plans and more than 70% have subscribed to the entire Suite instead of individual applications. Adobe hopes to be able to convince the remaining population to sign up for their subscriptions after the next release.

Adobe Diversifying into Hardware
In a surprising move though, Adobe is also looking at creating hardware. Later this year, Adobe is expected to release a digital pen and ruler set designed for iOS devices. The products, code-named Mighty and Napoleon, respectively, will work together with an iPad App that they are also developing and will help architects and design engineers with the process of drafting. The app and the hardware put together are expected to bring to the digital world the drafting tools most needed by designers. Adobe has yet to announce the timeline and price range of these products.

Their stock is trading at $67.63 with a market capitalization of $33.6 billion. It touched a 52-week high of $71.11 late last month.

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