Adobe (ADBE) Surges As Cloud-Based Initiatives Pay Off

Shares of software manufacturer Adobe Systems (ADBE: Charts, News) surged at the end of last week, after the company posted fourth quarter earnings of 44 cents per share, or $222.3 million, a 28% increase from the 35 cents per share, or $173.7 million, it posted a year earlier.

Adjusted for stock-based compensation, restructuring charges and other one-time items, Adobe earned 61 cents per share, down from the 67 cents per share it earned in the prior year quarter. Revenue rose 0.1% to $1.15 billion. This topped Adobe's prior forecast of an adjusted 53 cents to 58 cents per share on revenue of $1.08 billion to $1.13 billion. Overhead expenses also dropped 6.8%. Daily Chart
Adobe attributed its robust earnings to strong growth in subscriptions for its creative services, which added an average of 10,000 new subscribers weekly during the quarter - 25% faster growth than the third quarter. Many new customers were lured in by the free trial period for its products, which include its industry-standard Photoshop and Illustrator software, while 325,000 of those converted to paid subscriptions. Most paid subscriptions are annual contracts. CEO Shantanu Narayen touted the popularity of Adobe's cloud-based subscriptions during the earnings call, stating, "I think people are really seeing the benefits of always having access to the latest applications. The new products we're delivering as part of the cloud are seeing significant adoption, which I think bodes well for us." Adobe started transitioning from packaged software to cloud-based "software as a service" last year after sequential declines in earnings and revenue. The change was costly, causing Adobe to take a $94 million restructuring charge in the fourth quarter last year, but the new business model - which delivers software over the Internet and keeps customers instantly up to date via the Internet - has been successful, presenting more pricing options and flexibility to casual and professional users. This shift, however, still carries risks of cannibalization. An unlimited license for Adobe's traditional packaged Creative Suite software costs $780, while an annual cloud-based license costs $480. Therefore, Adobe needs to keep the customer subscribed for at least two years to be more profitable than its original product. Since revenue will initially be lower due to cloud-based subscriptions, the company has lowered its fiscal 2013 guidance from $4.4 billion to $4.1 billion. CFO Mark Garrett assured investors that this transition would ultimately be rewarding in the long run. "We get through that in 2013 and in 2014 and beyond, the build-up in subscriptions will offset the decline in license revenue," he stated. Using its new cloud-based platform, Adobe is also diversifying into digital marketing services, offering data mining services which help businesses measure page views, purchases and social media sites. These services help businesses streamline marketing and products for targeted consumer groups. Although the Creative Cloud, which includes its graphic design programs, and the Marketing Cloud, which includes these new marketing services, appear to be separate businesses, Narayen has stated that "there's no question that we're seeing quite a bit of synergy between the Creative Cloud and the Marketing Cloud." The customers of one segment become more likely to purchase products from the other one, accelerating Adobe's revenue growth in both simultaneously. Adobe trades at 15.8 times forward earnings with a 5-year PEG ratio of 1.46. The stock does not pay a dividend. The stock has risen 40% over the past twelve months. Other News About ADBE Adobe Shares Rise 5%; JM Praises Rating on Stock Adobe rallies as cloud-based initiatives increase both top and bottom lines. Adobe Systems 4th-Quarter Profit Rose 28% Amid Lower Expenses Lower expenses boost Adobe's fourth quarter earnings. Other Stocks in the News Best Buy Gives Founder More Time to Make a Bid Best Buy's investors hope for a last-minute takeover by its founder. Apple Analyst Sees $700 Ahead and 4 Analyst Insights Making Rounds Can Apple bounce back after several brutal weeks? Copyright 2012 by InvestorGuide.com, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. The news, analysis, commentary and profile information is not meant to be comprehensive, and the data provided is not guaranteed to be accurate. WebFinance Inc., the publisher of this newsletter, is not a registered investment advisor or a broker/dealer. This is not a stock recommendation newsletter but rather a source for investment ideas, and we encourage you to fully research any company before considering investing. The opinions expressed herein are those of the author and do not necessarily represent the views of nor are they endorsed by WebFinance Inc. No employee of WebFinance has owned or currently owns any shares in the company described above. The above is neither an offer nor solicitation to buy or sell any securities. The trading of securities may not be suitable for all potential readers of this newsletter, and the purchase of stocks mentioned in this newsletter may result in the loss of some or all of any investment made. We recommend that you consult a stockbroker or financial advisor before buying or selling securities or making investment decisions. We are not responsible for claims made by advertisers and sponsors. Anyone who makes decisions based on what they read here does so at their own risk and cannot hold WebFinance Inc. (DBA InvestorGuide.com, Inc.) or its employees responsible.

Published on Dec 17, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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