This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

How Adobe Became the New, Top Cloud Play

NEW YORK (TheStreet) -- Adobe's (ADBE - Get Report) transition to a pure, software-as-a-service (SaaS) company is unfolding at a smooth and rapid pace that's silencing the skeptics of this move. Adding to the positive sentiment is the company's proof that it can hold its own in the marketing cloud against tech titans such as Google (GOOG - Get Report).

"Adobe sees the cloud as the entire future of its franchise," says Norman Young, a senior equity analyst at Morningstar. So far, financial results are backing up this vision.

Adobe's young, Marketing Cloud, which was used by NBC in February to analyze viewership statistics during the Sochi 2014 Olympic Games, saw a revenue jump of 24% during the fiscal first-quarter. This comes in spite of well-funded digital analytics competitors such as Google Analytics, Salesforce (CRM), and comScore (SCOR). The 24% increase came in ahead of Morningstar's expectations, and was on pace with growth in the digital marketing space. If the Marketing Cloud can at least maintain an in-line pace of growth with the overall market, the business should be able to keep double-digit revenue growth per quarter over the next couple of years, Young noted.

Activist Shorts Austerity, Goes Long M&A

On Adobe's core, Creative, which caters to large content creation and publishing places, it's been successfully shepherding droves of customers to the cloud subscription service, away from legacy software licensing. The transition began only about a year and a half ago, but the results have been compelling, though in an unexpected manner.

Must Read: Here's Why Apple Is Selling More iPhones Than You Think

First quarter Digital Media revenue consisting of the Creative Cloud, Creative Suite (license sales) and Document Services declined 6.9% to $641.4 million, from a year ago. "When you look at these results, it's important to realize that they look bad, but that's actually a good thing," said Young.

The drop means customers are jumping over to Adobe's Creative Cloud subscription services because of cheaper upfront costs, and moving away from the expensive licenses of the legacy, packaged Creative Suite software, which the company no longer makes box sets for. These products can now only be purchased at places such as cheap channel resellers, who still bring revenue to Adobe when they buy licenses for reselling.

Any of the larger enterprises that are still renewing Creative licenses under licensing agreements are expected to turn over to the cloud soon. As of the end of the first-quarter, Adobe saw a 28% improvement in total paid subscribers to about 1.84 million from the last quarter. Young expects that at this rate of double digit, although natural decaying growth, Adobe is easily on schedule to hit its target of bringing 3 million customers on as total paid subscribers in the Creative Cloud by the end of this year and 4 million by the end of fiscal 2015; which means that the company is well on its way to making up for the difference between the lower upfront costs of the subscription model and the much higher prices of the prior, packaged software products.

If enough people are paying $50 a month versus $2,500 for a license that is renewed every two to three years or more, the gap will be closed, delivering Adobe towards the powerful lock-in advantages of the subscription model.

"I think at this point the market is assuming that Adobe, one, is going to continue to be able to capture additional incremental users above and beyond the 4 million that they expect to get by the end of the fiscal year 2015 because it's a cheaper product, has cheaper upfront costs -- and I should say because it locks you in even more," summarizes Young. "Not only are you using Adobe because everyone else is using Adobe, but you're using Adobe because all your projects are saved on the cloud now too. If you stop paying, you lose access to the software completely. You can't work if you're a production person."

"Instead of taking their sweet time to figure out if they want to make an upgrade for an expensive piece of software, customers are going to be paying all the time," says Young. "Everybody will be current, everybody will own a version."

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
ADBE $82.86 0.73%
GOOG $641.45 0.36%
AAPL $110.33 0.76%
FB $93.17 0.76%
TSLA $220.61 -2.70%


Chart of I:DJI
DOW 17,092.11 +41.36 0.24%
S&P 500 2,013.43 +15.91 0.80%
NASDAQ 4,821.3580 +10.57 0.22%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs