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Adobe financials impacted by move to cloud subscription apps

by Mark Tyson on 18 September 2014, 13:00

Tags: Adobe (NASDAQ:ADBE)

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Adobe published its Q3 earnings this week, showing a 46 per cent year-on-year slip in net profits, a result that failed to live up to market expectations. The company claims that the fall was due to higher operating expenses and weaker margins, reports the WSJ.

A net income of $44.7 million, $0.09 per share, was reported. The company expected a revenue rise of $975 million to $1.02 billion. However, due to a decline in gross margin from 85.2 per cent to 84.3 per cent, and an increase in operating expenses of 4.9 per cent, Adobe was only able to deliver $1.01 billion in revenue. These figures resulted in a near 5 per cent drop in share value. Non-GAAP earnings, on the other hand, exceeded both market expectations and its guidance, at $0.28 per share.

Are those good or bad clouds?

Adobe has been transitioning to cloud services and subscription-based products over recent months, shifting away from packaged software sold with large upfront payments. Chief Executive Shantanu Narayen highlighted faster-than-expected adoption of licenses for its Creative Cloud business with over 2.81 million paid subscribers, a decent 22 per cent increase of 502,000 subscriptions from the end of the previous quarter. However, despite the increase in subscriptions, revenue from Adobe's digital media business fell by more than 2 per cent in the third quarter.

"Adoption of Creative Cloud and Adobe Marketing Cloud continues to accelerate,” said Narayen. "We are the leader in both of these high-growth categories and have a rapidly growing pipeline, setting us up for a strong finish to the year in Q4."

A separate, more positive report from The Motley Fool shows that the company's growth in subscription revenue outpaced the decline in product revenue, resulting in revenue growth of 0.5 per cent year-over-year.

"In Q3, 63 percent of our revenue was recurring, demonstrating the continued success of our business model transformation," Adobe CFO Mark Garrett explained. The number is set to grow further with when the Adobe abandons product license sales completely and switches to a subscription-only business model.

Subscriptions: lower peaks, shallower troughs

A reason that may explain Adobe's underperformance in revenue could be due to the switch in model, where revenue is no longer recognised at the time of the sale, but instead, over the duration of the subscription. Adobe's deferred revenue that has yet to be recognised is said to have grown by 20 per cent since the end of fiscal 2013.

Wall Street predicts Adobe to deliver Q4 earnings of at least $0.31 per share on top of revenue of $1.09 billion.

Looking at the bigger picture. If Adobe can demonstrate a clear success with its switch to subscription payment based 'cloud' applications it could accelerate similar plans by other software vendors.



HEXUS Forums :: 13 Comments

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I will never be using Adobe software now, I don't want all this cloud crap. No wonder their profits are down, I don't want my software always linked to the internet! I'll just use GIMP for photo editing thanks
I'm not exactly keen on subscription software… even more so when it all stops working once you stop paying for the subscription, unless adobe have changed that recently. Adobe have one aspect of their business model that many others don't, they are the defacto (might as well say only) software used in graphic design/print etc and until there is something which is as good/better thats gets the same level of uptake professional users are screwed. There is no other option but to subscribe or use the old software, luckily it's not like adobe does much to the software year on year….

MS isn't much better with office, I'll be sticking with my office 2010 until I need to change it then I'm sure I can find a free alternative, at least they're not as stupidly overpriced.

I prefer the pay for software and then pay for an ‘updates’ subscription package along the lines of autodesk, you still get to keep the software even if you cancel the subscription. I don't mind this approach purely due to the fact I still have working software if I stop paying the subscription. Autodesk also have the option of renting continuously or for short periods.
You mean investor expectations of ‘cloud’ were unrealistic? Surely not. Maybe they should do a bit of market research before trying to coerce consumers into profit-pumping business models.
Serves them right. I too would never pay / month for any software. It works out to be more expensive in the long run. The software is never completely yours. You stop subscribing and the software stops working!

Unfortunately, this is almost the same model that other software like Norton Antivirus are following. You buy the software and after your 1 year expires, you no longer get new virus definitions. On older versions, you didn't get software updates but did get the virus definitions. Now, you have to pay twice!
OilSheikh
Unfortunately, this is almost the same model that other software like Norton Antivirus are following. You buy the software and after your 1 year expires, you no longer get new virus definitions. On older versions, you didn't get software updates but did get the virus definitions. Now, you have to pay twice!
Luckily in the case of Norton there are other alternatives out there that are as good (or better) for free, sadly with ‘industry standard’ software that isn't the case :(