Adobe’s Subscription Shift Puts Brakes on Profit, Sales

Adobe Systems Inc. (ADBE) shares rose to a record after the largest maker of graphic-design tools said it amassed more than 1 million online-service customers amid a shift away from software installed on personal computers.

A 47 percent jump in the number of Web subscribers, which exceeded some analysts’ estimates, coincided with a drop in sales and profit. Revenue for the period through August declined 7.9 percent to $995.1 million, the company said yesterday in a statement, missing the $1.01 billion average of analysts’ projections compiled by Bloomberg.

The results are validating the strategy of Chief Executive Officer Shantanu Narayen to push the maker of Photoshop and Illustrator software deeper into Internet services. While that’s crimping near-term revenue and profit, the transition to a suite of online tools called Creative Cloud positions Adobe for more predictable growth in the future, according to Josh Olson, an analyst at Edward Jones & Co.

“All eyes are really on this shift to the subscription pricing model and that’s ahead of schedule,” said Olson, who has a hold rating on the shares. “The sales miss is a reflection of a successful transition to the cloud.”

Shares in Adobe, based in San Jose, California, jumped 9.2 percent to $52.58 at the close in New York, the highest since the software maker’s initial public offering in 1986. The stock has advanced 40 percent this year, compared with a 14 percent increase in the Standard & Poor’s 500 Information Technology Index.

Subscription Shift

Earnings excluding some items were 32 cents a share in the fiscal third quarter, compared with analysts’ average prediction for 34 cents. Net income was $83 million, compared with $201.4 million a year earlier.

“The overwhelming majority of customers are moving away from perpetual licenses towards term-based licenses, demonstrating acceptance of the new offering,” Narayen said yesterday on a conference call with analysts.

Part of Adobe’s push to sell more design tools as subscriptions is aimed at reducing its reliance on programs for the declining PC market. Adobe said it now has 1.03 million Creative Cloud users -- which includes online versions of its popular Photoshop, Illustrator and Dreamweaver tools -- up from 700,000 at the end of the previous quarter.

The subscription growth of 331,000 in the latest quarter exceeded the projected 255,000-subscriber rise predicted by Brent Thill, an analyst at UBS AG in San Francisco.

Online Software

“It’s all subscriber-related,” Thill said of the rise in the company’s shares. “The near-term revenue is taking the co-pilot seat. It’s all about the value of those subscribers over time.”

Adobe said deferred revenue, which reflects sales from subscriptions that will be recognized over time, grew by $42.7 million during the quarter to $734 million, the highest in the company’s history.

Marketing-software sales also rose 25 percent, excluding the company’s acquisition of Neolane Inc., which closed in July. Adobe is squaring off against competitors including Salesforce.com Inc. (CRM) for sales of tools used by companies and advertising agencies to propagate their messages on the Web and through mobile devices, said Thill.

For the fiscal fourth quarter ending in November, revenue will be $1 billion to $1.05 billion, Narayen said on the call. Analysts are predicting $1.08 billion on average, according to data compiled by Bloomberg.

Adobe is on track to exceed its target of 1.25 million Creative Cloud subscribers by the end of the year, Chief Financial Officer Mark Garrett said.

“We will clearly beat that,” Garrett said in an interview. The company is expanding its market by targeting customers who could be better served by Adobe’s tools than Microsoft Corp. (MSFT)’s PowerPoint, he said. Adobe also unveiled an offering for photographers that combines Photoshop and its Lightroom editing software at a promotional price of $9.99 a month, Garrett said.

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

To contact the editor responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net

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