Adobe Profit Tops Estimates on Cloud Subscriber Growth

Adobe Systems Inc. (ADBE), the largest maker of graphic-design software, reported fiscal second-quarter profit that exceeded analysts’ estimates as subscribers signed up for cloud-computing services at a faster clip.

Profit excluding some items for the period through May was 36 cents a share, San Jose, California-based Adobe said in a statement yesterday. That beat the average estimate for 34 cents, according to analysts’ projections compiled by Bloomberg. Sales were $1.01 billion, matching the average estimate.

Chief Executive Officer Shantanu Narayen is in the middle of a drive to sell more of Adobe’s design tools as a subscription service via the Web, reducing the company’s reliance on programs for the declining personal-computer market. The 700,000 users of Adobe’s Creative Cloud software -- which includes online versions of its popular Photoshop, Illustrator and Dreamweaver tools -- is better than a prediction by Brendan Barnicle, an analyst at Pacific Crest Securities LLC in Portland, Oregon.

“That’s the best indicator of what the future revenue model’s going to look like and how far we are along in the transition,” said Barnicle, who has a sector perform rating on Adobe.

Amassing more than his estimate of 600,000 Creative Cloud subscribers a year after the product’s debut is “pretty encouraging” and puts the Adobe well on its way to reaching its goal of 1.25 million subscribers by the end of its fiscal year in November, Barnicle said.

Recurring Revenue

For the current fiscal third quarter, Adobe is forecasting sales of $975 million to $1.03 billion and earnings of 29 cents to 35 cents a share. Analysts on average are projecting profit of 35 cents on $1.01 billion in revenue.

Shares of Adobe rose 5.6 percent to $45.78 at the close in New York. They have advanced 21 percent this year through yesterday, compared with a 14 percent gain for the Standard & Poor’s 500 Index.

“The benefits of going to a recurring revenue model are priced in right now,” said Josh Olson, an analyst at Edward Jones & Co. in Des Peres, Missouri. “The market’s given them a lot of credit for this transition,” said Olson, who has a hold rating on the stock.

Adobe is throwing its weight behind Creative Cloud, which is aimed at professional print, Web and video designers. Adobe added 221,000 net new subscribers during the quarter, exceeding Olson’s estimate of a 185,000 gain. Adobe is also promoting digital-marketing tools for advertisers, which accounts for about a quarter of sales.

Cloud Transition

Adobe said in May it would focus on developing and selling the Creative Cloud and won’t release new editions of its desktop Creative Suite beyond the current version 6 of the application. That’s sparked an online debate among users who say the online subscriptions are too pricey.

Narayen addressed the dissent on a conference call with analysts yesterday, saying the decision to stop making desktop versions of Creative Suite “has caused concern among some customers.” Adobe will look at “additional options that will help them with the transition,” he said.

Adobe is seeing an average sale price of $37 a month from Creative Cloud users -- the list price for the full suite of products is $50 a month -- and will continue promotions to convert existing users to online products, Chief Financial Officer Mark Garrett said in an interview. The company is also looking into letting users access files even if they aren’t paying subscribers, he said.

“It’s fair and we’re listening,” said Garrett. “You’ll always have people who are upset about change.”

Creative Software

The transition to delivering software and tools over the Internet is aimed at smoothing out sales growth by relying less on product releases every two years. That’s sapping revenue as customers sign up for subscriptions instead of paying for packaged applications that can cost hundreds or thousands of dollars upfront.

Second-quarter sales declined 10 percent, and net income declined 66 percent to $76.5 million, Adobe said.

The company has said that 12.8 million people are using its desktop creative products -- 8.4 million of them on suites that bundle multiple programs and 4.4 million using individual tools. While Adobe has said it expects 4 million subscribers for the cloud service by the end of 2015, there’s a potential market for 8 million creative professionals, according to the company.

Sales of Adobe’s online marketing software increased 11 percent to $285.4 million. Adobe, which has been making acquisitions the past four years to expand in products for creating and measuring online advertising campaigns, is competing with Oracle Corp. (ORCL), Salesforce.com Inc. (CRM) and others in that market.

To contact the reporter on this story: Aaron Ricadela in San Francisco at aricadela@bloomberg.net

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

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