Cloud market has opened new avenues for various software companies and this technology is turning out to be a blessing in disguise for all the software and IT companies that joined the Cloud bandwagon. Adobe (ADBE, Financial) is one such company that was inclined to shift its business to offer cloud enabled solution for its various application software’s. The company did make huge investments in the past to venture into cloud technology, but to the delight of the company and its investors the strategic investment in the past is now paying off well, as the growth is propelled from the cloud based services.
The main advantage with the Cloud-enabled services for the company is the recurring subscription revenue that the company collects, bolstering its sustained revenue growth. The strategic policy of the company, in the past, to drop the perpetual licensing cost on “Adobe Marketing Cloud” the “Adobe creative cloud” and provide it as SaaS (Software as a Service) pricing model deployed over cloud has been the key to success of Adobe’s growth. The success Adobe is having with Creative Cloud is helping it to fuel the SaaS fire, when it comes to popular packaged products that are becoming SaaS applications and it becoming more viable to customers as they are done with the era of upfront licensing cost.
Overview of the quarter
The third quarter earning result for the company was almost in line with the consensus estimate. The revenue up 1.03% year over year, to record $1.005 billion as against $995.119 million in the same quarter last year. The revenue was in the range of the management guidance for the third quarter ($975 million to $1,025 billion). The revenue was partly offset, as the company dropped the perpetual licensing of Creative Cloud software suit. This also resulted in a sequential decline by 1%. But the SaaS model of the creative Cloud subscription continued the growth momentum in the third quarter and the total subscriber base count reaching 2.81 million, the count increased by 0.510 million when compared to same term last year. The subscription revenue contributed to around 54.4% to the total revenue, an increase by 82.9% year over year.
“Adoption of Creative Cloud and Adobe Marketing Cloud continues to accelerate,” said Shantanu Narayen, president and chief executive officer, Adobe. “We are the leader in both of these high-growth categories and have a rapidly growing pipeline, setting us up for a strong finish to the year in Q4.”
Repurchase program
In the second quarter the company was persistent with its share repurchase programs. Under this program, the total buyback was worth $133 million; it repurchased approximately 1.9 million shares during the quarter.
Journey Ahead
Adobe is truly idealistic about Creative Cloud adoption by the customers. The board is confident about its approach of mounting its subscriber’s base with new customers added to list of Creative Cloud paid subscribers, through product promotional activities, try and buy options and free enrollments.
The company anticipates total revenue for the fourth quarter to be in the range of $1.025 to $1.075 billion; this again is a sequential gain. The guideline seems to be on a weaker side, but one should consider the fact that company’s has dropped the perpetual licensing cost and is now targeting the subscription based SaaS model of pricing. The SaaS model will always be helpful for sustained revenue in the future for the company. The non-GAAP earning is expected to be in the range of $0.26 to $0.32.
Conclusion
The company had a fair performance in the second quarter. It is really a good sign that the client subscription base has been recording phenomenal growth, which sets a strong platform for future, sustained revenue gain. Marketing and after sales support is a prominent factor of an operating expense in any software company. But as the software companies move to cloud the after sales technical support cost reduces since software is deployed on cloud and all technical support is centralized. As technical support gets reduced with time, the company can save on support cost and it can invest in sales staff to yield higher revenue from boost of sales. The company also has a global foot print with an established brand name.
