Adobe Move to Subscriptions Constrains Profit, Sales Outlook

Adobe Systems Inc. signed up online subscribers at a faster-than-projected clip, adding to evidence it’s succeeding in reducing its dependence on software packaged for the slumping personal-computer market.

The jump in customers for Adobe’s Creative Cloud Web-based software to 1.44 million, which exceeded estimates, came as sales declined 9.7 percent to $1.04 billion in the period that ended in November, the company said in a statement today. That topped the $1.03 billion average of analysts’ projections, according to data compiled by Bloomberg.

Chief Executive Officer Shantanu Narayen is pushing the largest maker of graphic-design programs deeper into sales of Internet versions of its Photoshop, Illustrator and Dreamweaver applications, mirroring a broader shift in the way software is delivered. While the move is crimping sales and profit, analysts are projecting growth to return next year as Adobe signs up customers making recurring monthly payments.

“Adobe’s leading the charge as it relates to the old software guard,” said Brent Thill, an analyst at UBS AG who recommends buying Adobe. “Adobe was one of the first to see this new world coming and they adapted quicker than any of the other software companies. It was painful up front but now they’re reaping the benefits.”

The shares of San Jose, California-based Adobe rose as much as 6.3 percent in extended trading. The stock declined 1.2 percent to $53.99 at the close in New York, leaving it up 43 percent this year, compared with a 24 percent jump in the Standard & Poor’s 500 Index.

Sales Outlook

Adobe trimmed its sales and profit forecasts, underscoring the extent of income that will be lost in the transition. Profit excluding some items will be 22 cents to 28 cents a share on sales of $950 million to $1 billion in the period that ends in February, the company said. That compares with the average projection for profit of 33 cents on revenue of $1.02 billion.

The jump in customers for Adobe’s Creative Cloud Web-based software by 402,000 in the fourth quarter exceeded the 350,000 predicted by Thill and the 345,000 estimate of Brad Zelnick, an analyst at Macquarie Capital USA who has the equivalent of buy ratings on the stock.

Adobe had said it was targeting more than 1.25 million Creative Cloud subscribers by the end of this year. The company is also on track to surpass its target of 4 million by the end of 2015.

Cloud Software

Net income for the fiscal fourth quarter slumped 71 percent to $65.3 million, or 13 cents a share, compared with analysts’ average estimate of 14 cents. Profit is suffering as Adobe sells fewer full versions of its desktop software priced as high as $2,600 amid the shift to subscribers for Creative Cloud, which costs $50 a month per user.

Adobe is also promoting subscriptions to its Photoshop and Lightroom photography software for $10 a month, helping to drive awareness and adoption of Creative Cloud, Walter Pritchard, an analyst at Citigroup Inc., wrote in a research note. He recommends buying the shares.

Adobe is using subscriptions to reduce its reliance on packaged software as PC sales decline. Consumers are migrating to smartphones and tablets, while software used on laptops and desktops can run in Web browsers. PC shipments may decline 10.1 percent this year and 3.8 percent in 2014, according to market-researcher IDC.

The move is sapping growth more than analysts had predicted. Sales this year will be essentially unchanged, Adobe said, compared with the average estimate of 7 percent growth.

Earnings excluding some items will be $2 in 2015 and $3 in 2016; analysts had predicted $2.28 and $3.31 respectively, according to data compiled by Bloomberg.

“Adobe’s been getting a lot of credit for their migration to the cloud,” said Josh Olson, an analyst at Edward Jones & Co. who has a hold rating on the stock. “They have yet to really demonstrate the profitability of the model.”

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