Adobe's Decision to Move to the Cloud Has More Than Upside Than First Imagined

The transition of Adobe Systems (ADBE), the maker of software such as Omniture, Photoshop and other creative services, into a cloud computing company, has been more successful than initially imagined. While the stock has run a great deal in 2014, there may be significantly more upside, as the company adds more subscribers.

Adobe, which reported fiscal fourth quarter earnings Thursday, said it added 644,000 subscribers for its CreativeCloud, which has helped the company transition fully to a cloud computing company, leading to more predictable revenue growth.

2014 was a pivotal year as the company transitioned its business model from only selling boxed software to selling online subscriptions, which allow customers get the latest software instantly. Citigroup analyst Walter Pritchard sees now believes the company could have as many as 9.7 million subscribers by the end of fiscal 2017, up 3.45 million in 2014, leading to the company generating $7.5 billion in revenue, earning $4.49 a share.

In the fourth quarter, Adobe earned an adjusted 36 cents a share on $1.07 billion. Analysts surveyed by Thomson Reuters were expecting 30 cents a share on $1.06 billion. For the fiscal first quarter, Adobe expects to earn between 34 and 40 cents a share, with revenue coming in between $1.05 billion and $1.1 billion. Analysts were expecting 39 cents a share on $1.1 billion.

"Adobe continues to see solid traction for its products with net adds benefiting from single app purchases," Deutsche Bank analyst Nandan Amladi wrote in a research note, upping his price target to $85. "We see ADBE continuing to outperform among our large-cap coverage, with valuation still attractive on a growth-adjusted basis."

The company isn't sitting back on its laurels, as it's making acquisitions to boost its profile.

Adobe announced it was adding Fotolia to its CreativeCloud for $800 million, which may help drive further subscribers.

Fotolia, which allows users to purchase more than 34 million images, graphics and HD video, will be used to strengthen the CreativeCloud suite, as well as operating as a standalone product.

“The acquisition of Fotolia will reinforce Creative Cloud’s role as the preeminent destination for creatives,” said David Wadhwani, senior vice president, Digital Media, Adobe in a press release announcing the deal. “Creative Cloud is becoming the go-to marketplace for the creative community to access images, videos, fonts and creative talent, through critical creative services like Fotolia and our new Creative Talent Search capabilities.”

As the outlook for 2015 improves, coupled with the acquisition of Fotolia, Adobe investors may see additional upside, as more of its customers decide to move a software-as-a-service model, and stop opting to buy it in a box.

"Revenue could face a foreign exchange headwind in [fiscal year] 2015, and the company is selling more single application subscriptions, which have a lower initial average revenue per user," Pacific Crest Securities analyst Brendan Barnicle wrote in a note. "But the company continues to see better-than-expected renewal rates and expects [average revenue per user] to increase as customers expand the applications that they buy from Adobe. The company has already seen customers renewing on the suite product at permanent pricing rather than promotional pricing."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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