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Adobe Forecast Misses Amid Move to Subscriptions

Adobe Systems Inc. (ADBE) forecast fiscal fourth-quarter sales and profit that missed analysts’ estimates as the company offered a lower-priced subscription version of its flagship Creative Suite software.

Revenue for the current quarter, which ends Nov. 30, will be $1.075 billion to $1.125 billion, San Jose, California-based Adobe said in a statement yesterday. That fell short of the average analyst estimate of $1.21 billion, according to data compiled by Bloomberg. Profit excluding certain items will be 53 cents to 58 cents a share, less than the 67 cent estimate.

Chief Executive Officer Shantanu Narayen is pushing the world’s largest maker of graphic design software to offer more of its products over the Web and on mobile devices such as tablets in addition to personal computers. Adobe has also started a subscription model for Creative Suite that costs much less than the software sold for desktop computers.

“The shift to subscription pricing is going to result in lower reported revenue,” said Josh Olson, an analyst at Edward Jones & Co. in Des Peres, Missouri, in a telephone interview. “But it’s ultimately a good thing because the goal is to get to a more stable revenue model.”

Shares of Adobe rose 1.4 percent to $33.59 at 9:50 a.m. in New York. Through yesterday, the stock had increased 17 percent this year.

Subscriptions Added

For the third quarter, which ended Aug. 31, sales were $1.08 billion and profit excluding some items was 58 cents a share. Analysts on average had projected profit of 59 cents on revenue of $1.1 billion.

Net income rose 3.2 percent to $201.4 million, or 40 cents a share, from $195.1 million, or 39 cents, a year earlier.

Subscriptions for the Creative Cloud software suite grew to about 200,000 by the end of the quarter as Adobe added approximately 8,000 a week, more than the 5,000 weekly gains the company had anticipated.

“We believe through next year, as we get through more of this transition, we will be growing the business overall at a faster rate,” Chief Financial Officer Mark Garrett said in a telephone interview yesterday.

One version of the subscription-based software, Creative Cloud, is delivered over the Internet for $50 a month or $600 a year. It will take Adobe more than four years to collect from cloud customers as much as it generates from a single sale of the desktop version of the top-end “Master Collection,” which goes for $2,600.

‘Subscription Worry’

“We believe an overly pessimistic street view of the subscription transition and secular concerns around the shift from print to web are overblown and as these concerns abate, the stock is likely to move higher,” said Walter Pritchard, an analyst with Citigroup Inc.

Owners of some older versions of Creative Suite receive a promotional $30-a-month rate for the first year. A version of Creative Cloud for businesses will come later this year.

“One concern would be, after that 12 months, will we see any sort of fall-off in subscribers,” said Olson at Edward Jones. “Once the prices for the software are no longer promotional, how sustainable is it?”

Since a reorganization and job cuts announced last November, Adobe has concentrated its efforts on making design tools that use the increasingly popular HTML5 programming language instead of its proprietary Flash technology. The company is also investing in software for publishing printed and broadcast material to tablets and other devices.

To contact the reporters on this story: Aaron Ricadela in San Francisco at aricadela@bloomberg.net; Ryan Faughnder in New York at rfaughnder@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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